Test bank chapter 1 Introduction

Solution: total receipts = Singapore dollars 10,000,000 x .55 = $5,500,000
total premium = Singapore dollars 10,000,000 x .05 = 500,000
net receipts = $5,000,000

27. The premium for a British put pound with an exercise price of $1.70 is $.05. What is the breakeven spot rate for the buyer of the put?

A. $1.70.
* B. $1.65.
C. $1.75.
D. $1.60.
E. $2.10.


Solution: breakeven point = $1.70 - $0.05 = $1.65

28. You purchase a call option on British pounds for a premium of $.04 per unit with an exercise price of $1.65. The option will not be exercised until the expiration date, if at all. If the spot rate on the expiration date is $1.67, your net profit or net loss per unit is:

A. $.04.
B. $.02.
* C. -$.02.
D. -$.04.
E. $.50.


Solution: Use Equation (6-2) :
profit or loss = $1.67 - ($1.65 + $.04) = -$.02

Use the following information to answer the next three questions:

On October 23, the closing exchange rate of British pounds was $1.80. Calls which would mature the following January with a strike price of $1.85 were traded at $0.10.

29. The call options were .

A. in the money.
B. at the money.
* C. out of the money.
D. below the money.
E. above the money.


Solution: $1.80 - $1.85 = -$0.05

30. What is the intrinsic value?

A. -$.05.
B. $.05.
* C. $.00.
D. $.10.
E. $.50.


Solution: The mathematical value of the option is negative (-$0.05), but the intrinsic value is zero because it cannot be negative.

31. If the exchange rate of British pounds rises to $2.00 prior to the January option expiration date, what is the percentage return on investment for an investor who purchased a call on October 23?

A. 40%
B. 45%
* C. 50%
D. 55%
E. 70%