FOREX TRADING
Foreign Exchange Markets
Foreign-Exchange Markets: Spot rates, Options, and contracts?
Suppose you are the treasurer of a U.S. firm importing calculators from Japan. You have a ¥62,500,000 payable due in 90 days. The current spot rate is $0.005 per ¥, but you expect the ¥ to appreciate against the dollar in the next 90 days and buy a call option contract on ¥. The premium on the contract is 0.0002 and the strike price is 0.0055.
a) What is the dollar cost of the contract?
b) If the spot rate in 90 days is 0.0052, do you excercise the option or let it expire? What was your dollar gain or loss from holding the option contract?
c) If the spot rate in 90 days is 0.0057, do you exercise the option or let it expire? What was your dollar gain or loss from holding the option contract?
The initial dollar cost= 62,500,000 x .005= 312,500
spot rate in 90 days is .0052= 62,500,000 x .0052= 325,000. There is a gain of 13,000 and you would exercise this option.
spot rate in 90 days is .0057= 62,500,000 x .0057= 356,250. There is a gain of 31,250 and you would exercise this option.
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