Question

Can anybody answer the question and explain it ? thx a lot

5) You pay $3.25 for a call option on Luther Industries that expires in three months with a strike price of $40.00. Three months later, at expiration, Luther industries is trading at $41.00 per share. Your profit per share on this transaction is closest to? A) $1.00 B) - $2.25 C) - $1.00 D) $2.25 6) Which of the following is NOT true regarding a letter of credit? A) The importer applies to its local bank for the issuance of a letter of credit. B) The exporter applies to its local bank for the issuance of a letter of credit. C) The importer's bank cuts a sales contract based on its assessment of the creditworthiness of the importer. D) The importer and exporter agree on a transaction. Page 3 of 14 7) A currency swaps allows a multinational corporation to change the A) principal and interest rate on its debt B) nature of its debt from a fixed interest rate to a floating interest rate C) forward rate on contracts it secures to hedge exchange rate risk D) currency of denomination of its debts 8) The broker at Deutsche Bank quotes bid- ask rates of ¥104.15- 30/$. What would be its direct asking price for yen if the bank's € /$ ask rate is .6550? A) € 164.25A B) €.006281 C) € 159.24A D) €.0061A

Answer 1

5) Using the call option on the stock of Luther Industries we get the following.

Particulars	Amount
Exercise price	41
Current Stock price	42
Profit on sale of stock	1
Premium for call	-3.25
Net Pay off	-2.25

The answer is B. Net pay-off is -2.25$. We may earn a profit by selling the stock in the market for 42, as we have the right to buy it in 41 via call option, but we have also paid 3.25$ as premium resulting into a net loss.

6) The answer is B, the statement is incorrect. It is always the importer who issues the letter of credit as its a kind of a guarantee letter provided by the importer's bank to the exporter that the payment will be done on time against the goods exported.

7) The answer is C, the swap is a kind of forward contract where the firms exchange principal and interest of a particular debt on their balance sheet. Its is used to have a hedge on the currency rate risk exposure of the balance sheet.    

8) We will use the cross currency concept to get the rate for Yen/Euro.

The ask price for Yen/$ is 104.30 and the asking price of Euro/$ is 0.6550. We need asking price for Yen/Euro. If we look at the currency exchange rate of Euro/$ we see that the euro is the price currency and the USD is the base currency. But we require Euro as the base currency in the new equation.

So we will convert the Euro/$ exchange rate by dividing 1 by the exchange rate: 1/0.6550

= 1.5267 is the quote for $/euro. Now we will multiply to get the desired rate.

Yen/$ * $/Euro = 104.30 * 1.5267

= 159.2348 is the answer which is the option C