Question

3) Assume that Smith Corporation must pay 100,000 British pounds in 90 days. A call option exists on British pounds with an exercise price of $1.60, a 90-day expiration date, and a premium of $.03. A put option exists on British pounds, with an exercise price of $1.57, a 90-day expiration date, and a premium of $.02. Determine the amount of dollars it will pay, including the amount paid for the option premium if it purchases and exercises an option. Assume the interest rate is 0%. A) S163,000. B) $159,000. C) $162,000. D) None of the above. 4) Why do US MNCs instruct their foreign subsidiaries to buy US treasuries? A) To avoid tax payments. B) To earn higher interest rates. C) To avoid losses from changes in foreign exchange rates. D) A&C.

Answer 1

(3)

A call option gives the holder the right to buy the underlying asset.

Smith Corporate needs to buy 100,000 pounds in 90 days. Hence, it will buy a call option.

If a call option is exercised, the price paid is the exercise price.

If the option is exercised, the total amount paid per pound = strike price + premium paid.

Dollars paid per pound = $1.60 + $0.03 = $1.63.

Amount of dollars paid = dollars paid per pound * number of pounds.

Amount of dollars paid = 100,000 * 1.63 = $163,000.