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A U.S. importer will have a net cash outflow of BP3 million for goods bought. The payment date will be late September 2014. On April 20, 2014, the U.S. importer locks in the maximum dollar cost of buying BP 3 million by buying PHLX calls on BP, with a strike price of $1.68/BP and an expiration date of October 30, 2014. The option premium on that date is $0.01/BP. The options are available in multiples of BP 0.25 million. There is a brokerage commission of $40 per option contract.
(1) What are the maximum possible dollars the US importer could pay for BP3 million?
(2) The spot rate on the September payment date turns out to be $1.70/BP. The importer can either exercise the call options or sell them back at their market value. Assume that he can sell them back at $0.0205 per BP if he chooses to. What is the actual dollar cost of buying BP3 million?
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