In April 2012, an FI Bought a One-Month Sterling T-Bill

question 80

Multiple Choice

In April 2012, an FI bought a one-month sterling T-bill paying £100 million in May 2012. The FI's liabilities are in dollars, and current exchange rate is $1.6401/£1. The bank can buy one-month options on sterling at an exercise price of $1.60/£1. Each contract has a size of £31,250, and the contracts currently have a premium of $0.014 per £. Alternatively, options on foreign currency futures contracts, which have a size of £62,500, are available for $0.0106 per £.
-How many options should the FI purchase, and what will be the cost?

• A)1,600 contracts for $16.96.
• B)1,600 contracts for $1,060,000.
• C)3,200 contracts for $44.80.
• D)3,200 contracts for $1,400,000.
• E)3,200 contracts for $2,800,000.

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Definitions:

Cash Expense

Expenses that require immediate outlay of cash during an accounting period.

Depreciation

The reduction in the value of an asset over time, usually due to wear and tear or obsolescence.

Net Working Capital

The difference between a company's current assets and current liabilities, indicative of its short-term financial health and operational efficiency.

Operating Cash Flows

The cash generated from the normal operations of a business, reflecting its ability to generate sufficient revenue to maintain and grow operations.