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What is the cost of option

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Suppose an Australian importer imports cars from Germany and has to make a €1,000,000 payment to a German exporter in 90 days. The importer could purchase a European call option to have the euros delivered to him at a specified exchange rate (the strike price) on the due date. Suppose further that the option premium is AUD0.015 per euro and the exercise price is AUD1.50. Discuss the following status/scenarios of this call option for the Australian importer:

  1. If the Spot rate were to rise to AUD1.55 or fall to AUD1.45 indicate whether the option is in-the-money or out-of-the-money for each scenario and will the importer exercise or let the option lapse and why?
  2. What is the cost of this option?
  3. Alternative hedging strategies are forwards and futures. How do they differ from options?
  4. Australian importer may decide to hedge only the sales of cars it has clinched, not the ones it expects in order to avoid speculation. Comment on Australian importer's currency risk hedging strategy.

Reference no: EM133071821

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