1. Boeing Corporation imported a Rolls-Royce jet engine for £8 million payable in one year. In the over-the-counter market, Boeing purchased a call option on 8 million British pounds with an exercise price of $1.45/£ and a one-year expiration. The option premium is $0.05/£.
If the spot exchange rate is $1.48/£ on the expiration date, what is the amount of U.S. dollars paid on the expiration date after the premium (the upfront cost)? The one-year U.S. interest rate is $2.5%. (Note the time value of money is considered in the upfront cost paid.) (Points : 3.3)
a 11,600,000
b $12,010,000
c $12,250,000
d $11,190,000
e $11,430,000
2. What are the arithmetic and geometric average returns for a stock with annual returns of 22 percent, 9 percent, -7 percent, and 13 percent?
3. Suppose that you have been offered two packages. Package A contains 1000 call options at strike price of $182. Package B contains 100 call options at strike price of $80. Suppose stock price next year could be $100 with probability 0.75 and $200 with probability 0.25. Suppose that you are risk neutral. Which package would you choose.