Micca Metals, Inc. is a specialty materials and metals company located in Detroit. The company specializes in specific precious metals and materials that are used in a variety of pigment applications. Micca just purchased a shipment of phosphates from Australia for AUD6,000,000 payable in six months. Six month at-the money call options on AUD6,000,000 at an exercise price of USD0.9000/AUD1 are available at a premium of 3%.
Using the graphs provided in the PowerPoint notes adjusted for the data in this question, illustrate and explain Micca Metals’ position should it use such an option.
What is the break-even exchange rate?
What is the maximum amount that Micca Metals could realize if the exchange rate moves in their favor?
What is the maximum amount they could realize if the exchange rate moves against them?
What would Micca Metals expect future exchange rates to be to motivate the use of this option?