Suppose That the Exchange Rate Is €1

question 64

Multiple Choice

Suppose that the exchange rate is €1.25 = £1.00. Options (calls and puts) are available on the Philadelphia exchange in units of €10,000 with strike prices of $1.60/€1.00.
Options (calls and puts) are available on the Philadelphia exchange in units of £10,000 with strike prices of $2.00/£1.00.
For a U.S. firm to hedge a €100,000 payable,

• A) buy 10 call options on the euro with a strike in dollars.
• B) buy 8 put options on the pound with a strike in dollars.
• C) sell 10 call options on the euro with a strike in dollars.
• D) sell 8 put options on the pound with a strike in dollars.
• E) both a and b
• F) both c and d

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Definitions:

Taxed

Subjected to financial charges or levies imposed by a government on income, transactions, or property.

Partnership

A legally sanctioned business model where two or more associates share both the responsibilities of managing the business and the profits derived from it.

Partnership

A legal form of business operation between two or more individuals who share management and profits.

Personal Income

The total income received by an individual from all sources before taxes.