Wilson Ltd. Corporation will need to purchase 200,000 British pounds in 90 days.

Question

Wilson Ltd. Corporation will need to purchase 200,000 British pounds in 90 days. A call option exists on British pounds with an exercise price of $1.68, a 90 day expiration date, and a premium of $.04. A put option exists on British pounds, with an exercise price of $1.69, a 90 day expiration date, and a premium of $.03. Wilson plans to purchase options to cover its future payables. It will exercise the option in 90 days (if at all). It expects the spot rate of the pound to be $1.76 in 90 days. Determine the amount of dollars it will pay for the payables, including the amount paid for the option premium. SHOW ALL WORK

A) $360,000.

B) $338,000.

C) $332,000.

D) $336,000.

E) $344,000.

Explanation / Answer

A call Option is In-The-Money when the strike price is lower than the market price.

Here spot rate = $1.76

Strike price = 1.68

Call premium = $0.04

Since spot rate is greater than strike price so the option must be exercised.

So total amount payable for 200,000 GBP is calculated below:

Total amount payable = GBP 200,000 × ($1.68 + $0.04)

                                    = GBP 200,000 × $1.72

                                     = $344,000

Total amount payable in term of dollar after 90 days is $344,000

Hence, Option (E) is correct answer.

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