Assume That Jones Co

question 12

Multiple Choice

Assume that Jones Co.will need to purchase 100,000 Singapore dollars (S$) in 180 days.  Today's spot rate of the S$ is $.50,and the 180day forward rate is $.53.  A call option on S$ exists,with an exercise price of $.52,a premium of $.02,and a 180day expiration date.  A put option on S$ exists,with an exercise price of $.51,a premium of $.02,and a 180day expiration date.  Jones has developed the following probability distribution for the spot rate in 180 days:

The probability that the forward hedge will result in a higher payment than the options hedge is _______ (include the amount paid for the premium when estimating the U.S.dollars required for the options hedge) .

• A) 0%
• B) 10%
• C) 30%
• D) 40%
• E) 70%

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Definitions:

North American Free Trade Agreement

A trade agreement among the United States, Canada, and Mexico to reduce trade barriers and promote economic exchange.

Efficient Equilibrium

A state of balance in a market where resources are allocated in the most efficient way possible, with no room for welfare improvement without making someone else worse off.

Relative Price

The price of one good or service compared to another, usually indicating how much of one can be exchanged for the other.

Economic Outcome

The result of economic activities, often measured by metrics such as GDP growth, unemployment rates, and inflation.