Strategic Financial Management
STRATEGIC FINANCIAL MANAGEMENT
REVISION
1. Selling Currency Call Options. Mike Suerth sold a call option on Canadian dollars for $.01 per unit. The strike price was $.76, and the spot rate at the time the option was exercised was $.82. Assume Mike did not obtain Canadian dollars until the option was exercised. Also assume that there are 50,000 units in a Canadian dollar option. What was Mike’s net profit on the call option?
ANSWER: Premium received per unit = $.01 Amount per unit received from selling C$ = $.76 Amount per unit paid when purchasing C$ = $.82 Net profit per unit = –$.05 Net Profit = 50,000 units × (–$.05) = –$2,500
2. Speculating with Currency Put Options. Alice Duever purchased a put option on British pounds for $.04 per unit. The strike price was $1.80 and the spot rate at the time the pound option was exercised was $1.59. Assume there are 31,250 units in a British pound option. What was Alice’s net profit on the option?
ANSWER:
Profit per unit on exercising the option = $.21 Premium paid per unit = $.04 Net profit per unit = $.17 Net profit for one option = 31,250 units × $.17 = $5,312.50
3. Hedging With Currency Options. When would a U.S. firm consider purchasing a call option on euros for hedging? When would a U.S. firm consider purchasing a put option on euros for hedging?
ANSWER:
A call option can hedge a firm’s future payables denominated in euros. It effectively locks in the maximum price to be paid for euros. A put option on euros can hedge a U.S. firm’s future receivables denominated in euros. It effectively locks in the minimum price at which it can exchange euros received.
4. Forward versus Currency Option Contracts. What are the advantages and disadvantages to a U.S. corporation that uses currency options on euros rather than a forward contract on euros to hedge its exposure in euros? Explain why an MNC use forward contracts to hedge committed transactions and use
REVISION
1. Selling Currency Call Options. Mike Suerth sold a call option on Canadian dollars for $.01 per unit. The strike price was $.76, and the spot rate at the time the option was exercised was $.82. Assume Mike did not obtain Canadian dollars until the option was exercised. Also assume that there are 50,000 units in a Canadian dollar option. What was Mike’s net profit on the call option?
ANSWER: Premium received per unit = $.01 Amount per unit received from selling C$ = $.76 Amount per unit paid when purchasing C$ = $.82 Net profit per unit = –$.05 Net Profit = 50,000 units × (–$.05) = –$2,500
2. Speculating with Currency Put Options. Alice Duever purchased a put option on British pounds for $.04 per unit. The strike price was $1.80 and the spot rate at the time the pound option was exercised was $1.59. Assume there are 31,250 units in a British pound option. What was Alice’s net profit on the option?
ANSWER:
Profit per unit on exercising the option = $.21 Premium paid per unit = $.04 Net profit per unit = $.17 Net profit for one option = 31,250 units × $.17 = $5,312.50
3. Hedging With Currency Options. When would a U.S. firm consider purchasing a call option on euros for hedging? When would a U.S. firm consider purchasing a put option on euros for hedging?
ANSWER:
A call option can hedge a firm’s future payables denominated in euros. It effectively locks in the maximum price to be paid for euros. A put option on euros can hedge a U.S. firm’s future receivables denominated in euros. It effectively locks in the minimum price at which it can exchange euros received.
4. Forward versus Currency Option Contracts. What are the advantages and disadvantages to a U.S. corporation that uses currency options on euros rather than a forward contract on euros to hedge its exposure in euros? Explain why an MNC use forward contracts to hedge committed transactions and use