Question

Assume that Smith Corp. 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. Smith Corporation 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.

a. $344,000
b. $343,765
c. $344,998
d. $347,000

Answer 1

maximum amount in dollar is payable = $344000

so correct option is a. $344,000

Step-by-step explanation:

solution

we find here premium that is paid here

premium paid = 200000 pounds × $0.04

premium paid = 8000

and

amount payable in Dollar for 200000 pounds is

amount payable in Dollar = 200000 × $1.68

amount payable in Dollar = $336000

so whatever is happen in market

maximum amount in dollar is payable is

maximum amount in dollar is payable = $336000 + $8000

maximum amount in dollar is payable = $344000

so correct option is a. $344,000