Question

1. A put option has an exercise price of $30 and a stock price of $25. If the put option is trading for $5.25, what is the intrinsic value of the option?

a. $1 b. $2 c. $3 d. $5

2. A call option has an exercise price of $30 and a stock price of $34. If the call option is trading for $5.25, what is the intrinsic value of the option?

a. $0.00 b. $1.25 c. $4.00 d. $5.25

3. Your firm is a U.K.-based importer of bicycles. You have bought €750,000 worth of bicycles from an Italian firm. Payment (in euros) is due in one year. Your firm wants to hedge the payable into pounds. Spot exchange rate are $2/£ and 1.55/€ The interest rates are 3% in €, 6% in $ and 4% in £, all quoted as an APR, Calculate the future value in pounds of the cost in pounds of being able to pay the supplier €750,000

a. £564,320.39 b. £586893.20 c. £728,155.34 d. None of the above

Answer 1

1)	Intrinsic Value (Put) = Strike Price – Underlying Price = 30-25 = $5 [Option - d]
2)	Intrinsic Value (Call) = Underlying Price – Strike Price = 34-30 = $4 [Option - c]
3)	Create a Euro asset that will have a maturity value of E750000
	in one year.
	So the amount to be invested = 750000/1.03 =	€     7,28,155.34
	For this amount to be borrowed in pounds today = (728155.34*1.55)/2 =	£     5,64,320.39
	[Cross rate has been used as there is not direct quote for pounds
	in terms of euro]
	Loan maturity amount after 1 year = 564320.39*1.04 =	£     5,86,893.21
	Answer: Option [b] - £586,893.20