Suppose That the Exchange Rate Is €1

question 32

Multiple Choice

Suppose that the exchange rate is €1.25 = £1.00.Options (calls and puts) are available on the London exchange in units of €10,000 with strike prices of £0.80 = €1.00.Options (calls and puts) are available on the Frankfurt exchange in units of £10,000 with strike prices of €1.25 = £1.00.For a U.K.firm to hedge a €100,000 receivable,

• A)buy 10 call options on the euro with a strike in pounds sterling.
• B)buy 10 put options on the euro with a strike in pounds sterling.
• C)buy 8 call options on the pound with a strike in euro.
• D)buy 10 put options on the euro with a strike in pounds sterling and buy 8 call options on the pound with a strike in euro.

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