Suppose That the Exchange Rate Is €1

question 89

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 receivable,

• A) buy 10 call options on the euro with a strike in dollars.
• B) buy 10 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:

Guns And Butter

A term used to describe a country's decision to allocate its resources between defense and civilian goods.

Production Possibility Frontier

A curve depicting all maximum output possibilities for two or more goods given a set of inputs.

Production Possibility Frontier

A curve depicting the maximum attainable combinations of two products that may be produced with available resources and technology.

Good X

Often refers to a specific product or commodity being analyzed or discussed in economic models.