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

Explain what the law is in this situation, Corporation Hallmark, located in...

Corporation Hallmark, located in California, was in the business of manufacturing custom-ordered greeting cards, boxes, wrapping paper, and other paper products. Its operation is v

Explain the trade finance, Question: Trade finance is much facilitated ...

Question: Trade finance is much facilitated by banks' intervention as guarantors for the execution of financial commitments on behalf of importers. Banks provide a large variet

Capital Budgeting, Suppose that Oxford Inc. is interested in the two new pr...

Suppose that Oxford Inc. is interested in the two new products, AME and CGK. Because of its capital budget constraint, it can only launch one new product line. Eric just graduated

Efficiency, differentiate between aloocative effiency and pricing effiency

differentiate between aloocative effiency and pricing effiency

INVESTMENT DECISION, You are a ceo of a sotware firm that has limited acces...

You are a ceo of a sotware firm that has limited access to debt equity markets. The average return on last year projects is 28 % . and cost of capital is 12%. would npv pr Irr be

Explain how the crank-nicolson scheme, Solution of the Black-Scholes model ...

Solution of the Black-Scholes model is obtained through a transformation into a heat equation. The general one-dimensional heat equation is given by where α > 0 is a consta

Mergers had on fees assessed for retail bank services?, What effects have m...

What effects have mergers had on fees assessed for retail bank services? A: The impact is not clear. Market conditions and the level of competition often determine the cost for

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

Allocative & pricing efficiency, differentiate between allocative efficienc...

differentiate between allocative efficiency and pricing efficiency

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