Question

4) Assume that Smith Corporation will receive 100,000 British pounds in 90 days. A call option exists on British pounds with an exercise price of $1.65, a 90-day expiration date, and a premium of $.03. A put option exists on British pounds, with an exercise price of $1.61, a 90-day expiration date, and a premium of $.02. Determine the amount of dollars it will receive, including the amount paid for the option premium if it purchases and exercises an option. Assume the interest rate is 0%. A) $159,000. B) $162,000. C) $163,000. D) $168,000. 5) The current spot exchange rate is $1.55/€ and the three-month forward rate is $1.50/€. You enter into a short position on €1,000 for 3 months. At maturity, the spot exchange rate is $1.40/€. How much have you made or lost? A) Lost $50 B) Made $100 C) Lost $100 D) Made €100 6) Thornton Corporation has extensive liabilities denominated in Cyprus pounds resulting from imports from Cyprus. However, Thorton sells only in the United States and its revenues are denominated solely in U.S. dollars. Thorton has no foreign subsidiaries. Which of the following is probably NOT true? A) Thornton would benefit from a depreciation of the Cyprus pound. B) Thornton has at least some economic exposure. C) Thorton has at least some translation exposure. D) Thorton has at least some transaction exposure.

Answer 1

Smith Corporation will receive 100000 British pounds. So It will need to sell pounds for Conversion to Dollars.      
To sell pounds at 90 days, it will Choose Put option with Excercise price of $1.61 at a Premium of 0.02      
If Excercise the option, he will Sell 100000 pounds at $1.61.       
Total Proceeds in Dollar =100000*1.61=   161000  
Premium paid = 100000*0.02=   2000  
      
So net proceeds from 100000 pounds = 161000-2000=   159000  
      
Answer is a,    $159,000.00  
      
Note: Separate first question is Answered as per HOMEWORKLIB POLICY