Explain when bank of maryland will exercise the option

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Reference no: EM1346386

a) Should Bank of Maryland buy € call options or buy € put options if it wants to hedge its exchange rate exposure? Explain why.

b) Calculate Bank of Maryland's payoffs and profits associated with the options position and futures position within its range of expected exchange rates at $1.11/€, $1.14/€; $1.15/€; $1.16/€; and $1.20/€. Ignore transaction and maintenance costs and margins.

c) Explain when Bank of Maryland will exercise the option.

d) What is Bank of Maryland's break-even 60-day spot price on the option contracts? On the futures contracts?

e) At what level(s) of exchange rate Bank of Maryland will be in-the-money? And outof- the-money?

Reference no: EM1346386

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