What is the cost of the option contract, Corporate Finance

Assignment Help:

Question:

In view of its international operations management, Remo Ltd which is based in USA expects to make a payment of £ 50,000 to a UK supplier for raw materials in six months time. Remo Ltd wants to avoid any currency fluctuations. As such the Finance Director proposes to use a currency forwards in view to manage this transaction.

The forward rate offered by the bank is $1.601. The spot exchange rate is $1.781/ £ after six months.

Required

(i) What is the payment to be made if Remo Ltd enters the forward contract with the bank?

(ii). In the case above, which counterparty bears the credit risk? Justify your answer.

(iii) Outline in detail the advantages of using forward contracts as a means of external techniques of risk management.

Part (b)

Stone Age Plc based in US expects to receive income from one of its subsidiaries based in UK in June 2009. The amount of receipts is £100, 000. Stone Age Plc does not want to face any currency risks. As such, Stone Age Plc intends to use options to manage the currency risks.

The current exchange rate is $1.650/£.  

The details of the option contract are as follows:

Contract Amount: £ 25 000
Premium: £ 500 per contact 
Exercise rate: $1. 600/£

In June 2009, the spot rate is $1.520/£.

Required:

(i) What is the cost of the option contract in $ terms?

(ii) With supporting workings, advise Stone Age Plc whether to exercise the option or not to exercise the option.

(iii). Outline the advantages of using options as a means of external risk management technique and illustrate how an  option can be used to benefit from upside potential in case of a currency call option.


Related Discussions:- What is the cost of the option contract

Equity financing with debt financing, Seattle Health Plans currently uses z...

Seattle Health Plans currently uses zero debt financing.  Its operating income (EBIT) $1 million, and it pays taxes at a 40 percent rate.  It has $5 million in assests and because

Discounted free cash flow (dfcf) valuation, Benefits FCF is widely used...

Benefits FCF is widely used valuation to estimate enterprise value. It measures the value of free cash flow which organisations generate from daily operating activities. DFCF m

Experts averag - forecasting methods, This method simply calculates the ave...

This method simply calculates the average of a number of expert estimates. Let E denote the number of experts, and mn,e denote the forecast of expert e, e =1, ... ,E, for SKU n 2N.

Compute the current market price of the stock, Question : Alpha Ltd. - ...

Question : Alpha Ltd. - an 100% equity company - is following a payout ratio of 40% during the last several years. The financial managers of the company are now considering wh

Procter and Gamble, Summarize the key statistics for the stock and the indu...

Summarize the key statistics for the stock and the industry (choose 8 items you believe informative, such as P/E ratio, market capitalization, dividend yield, ROE, sales etc.tion..

Bonds, you buy a car for ths 10000000 to be repaid in 3 years, with annua i...

you buy a car for ths 10000000 to be repaid in 3 years, with annua interest of 12%. preapare a loan amortization table

Multinational Business Finance, The Vodafone Corporation arranged a one-yea...

The Vodafone Corporation arranged a one-year, $1.5 million loan to fund a foreign project. The loan was denominated in Euros and carried a 10% nominal rate. The exchange rate at

Touring Enterprises, As the company''s sales and earnings increased, so did...

As the company''s sales and earnings increased, so did the demand for capital. The firm''s needs included inventory as well as additional space to house the inventory, computer fac

Merger, The Chocolate ice cream company and the vanilla ice cream company h...

The Chocolate ice cream company and the vanilla ice cream company have agreed to merge and form Fudge Swirl Consolidated.Both companies are exactly alike that are located in differ

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd