Question

Malibu, Inc., is a U.S. company that export goods to British. It plans to use put options to hedge receivables of 100,000 pounds in 90 days. Three put options are available that have an expiration date 90 days from now. Fill in the number of dollars needed to receive for the receivables (including the option premium paid) for each option available under each possible scenari Option A Option B Option C Scenario Spot rate of Probability Exercise price- $1.63 Exercise price-$1.71 Exercise price $1.79 pound in 90 days Premium $0.03 Premium $0.04 Premium $0.05 10% 20% 30% 15% 25% $1.50 $1.55 $1.60 $1.75 $1.80 Based on the probability given in the table, which option will you choose? (A, B, C)

Answer 1

	ANALYSIS OF Option A
		Payoff per Pound:
		Rate at expiration in dollar=S
		Exercise Price =$1.63
		If S> or=$1.63, payoff=Nil
		If S< $1.63, payoff=$(1.63-S)
		S	A	B	C=B*100000	E=100000*0.03	F=C+E	G=F*A
		Spot rate at expiration	Probability	Payoff per Pound	Total payoff	Cost of premium	Net amount	Net amount*probability
	1	$1.50	10%	$0.13	$13,000	($3,000)	$10,000	$1,000
	2	$1.55	20%	$0.08	$8,000	($3,000)	$5,000	$1,000
	3	$1.60	30%	$0.03	$3,000	($3,000)	($0)	($0)
	4	$1.70	15%	$0	$0	($3,000)	($3,000)	($450)
	5	$1.80	25%	$0	$0	($3,000)	($3,000)	($750)
							SUM	$800
	ANALYSIS OF Option B
		Payoff per Pound:
		Rate at expiration in dollar=S
		Exercise Price =$1.71
		If S> or=$1.71, payoff=Nil
		If S< $1.71, payoff=$(1.71-S)
		S	A	B	C=B*100000	E=100000*0.04	F=C+E	G=F*A
		Spot rate at expiration	Probability	Payoff per Pound	Total payoff	Cost of premium	Net amount	Net amount*probability
	1	$1.50	10%	$0.21	$21,000	($4,000)	$17,000	$1,700
	2	$1.55	20%	$0.16	$16,000	($4,000)	$12,000	$2,400
	3	$1.60	30%	$0.11	$11,000	($4,000)	$7,000	$2,100
	4	$1.70	15%	$0.01	$1,000	($4,000)	($3,000)	($450)
	5	$1.80	25%	$0	$0	($4,000)	($4,000)	($1,000)
							SUM	$4,750
	ANALYSIS OF Option C
		Payoff per Pound:
		Rate at expiration in dollar=S
		Exercise Price =$1.79
		If S> or=$1.79, payoff=Nil
		If S< $1.79, payoff=$(1.79-S)
		S	A	B	C=B*100000	E=100000*0.05	F=C+E	G=F*A
		Spot rate at expiration	Probability	Payoff per Pound	Total payoff	Cost of premium	Net amount	Net amount*probability
	1	$1.50	10%	$0.29	$29,000	($5,000)	$24,000	$2,400
	2	$1.55	20%	$0.24	$24,000	($5,000)	$19,000	$3,800
	3	$1.60	30%	$0.19	$19,000	($5,000)	$14,000	$4,200
	4	$1.70	15%	$0.09	$9,000	($5,000)	$4,000	$600
	5	$1.80	25%	$0	$0	($5,000)	($5,000)	($1,250)
							SUM	$9,750
		OPTION TO BE CHOSEN	Option C