Problem1. Deenoo is a Canandian based corporation, it has ordered DM 625,000 of merchandise from a German supplier and the payment is due on the 30th of November 2010. Suppose that Deenoo may buy option contracts with a strike price of CAD 0.60/DM and the expiration date is 30th of November 2010 and selling at a premium of CAD 0.0107. Each call option gives the holder the right to purchase DM 125,000.
Required:
Question1. How many call options contracts must be purchased by Deenoo in order to hedge against the currency risk of the payment of DM 625,000 on the 30th of November 2010?
Question2. How much will be paid to purchase contracts?
Question3. Assume that on the 30th of November 2010, the spot rate is CAD 0.625/DM. Will the call option be exercised or not?
Question4. How much will it cost Deenoo to pay for its supply?
Question5. How much will Deenoo save by exercising options contracts?
Question6. Assume that on the 30th of November 2010, the spot rate is CAD 0.570/DM. Will the call option be exercised?
Question7. How much will the merchandise cost Deenoo?
Question8. Most of us tend not to pay sufficient attention to the details of life insurance policy until someone dies or until we are in dire need of some cash. Explain fully the following provisions usually set out in a life insurance policy contract:
i) Misstatement of Age clause
ii) The incontestable clause
iii) The Entire contract clause