You Have Written a Call Option on £10,000 with a Strike

question 83

Multiple Choice

You have written a call option on £10,000 with a strike price of $20,000. The current exchange rate is $2.00/£1.00 and in the next period the exchange rate can increase to $4.00/£1.00 or decrease to $1.00/€1.00 . The current interest rates are i_$ = 3% and are i_£ = 2%. Find the hedge ratio and use it to create a position in the underlying asset that will hedge your option position.

• A)Buy £10,000 today at $2.00/£1.00
• B)Enter into a short position in a futures contract on £6,666.67
• C)Lend the present value of £6,666.67 today at i_£ = 2%
• D)Enter into a long position in a futures contract on £6,666.67
• E)Both c and d would work
• F) None of the above

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Definitions:

Goodwill Impairment

The decrease in the value of goodwill on a company's balance sheet when the carrying amount exceeds the fair value.

Private Companies

Businesses whose ownership is private, meaning their shares are not traded on public stock exchanges, and often their financial information is not disclosed to the public.

Amortization Expense

The gradual reduction of a debt over time or the allocation of the cost of an intangible asset over its useful life.

Fair Value

The revenue generated from liquidating an asset or cost of moving a liability in a coordinated market operation on the day of measurement.