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7. Bulldog Corporation has payables of €125,000, 90 days from now. There is a call option...

7. Bulldog Corporation has payables of €125,000, 90 days from now. There is a call option available with an exercise price of $1.05. Assume that the option premium is $0.03 per unit and that Bulldog buys this option. Bulldog does not have to exercise its call option if it can obtain pounds at a lower spot rate. Bulldog expects the spot rate of the euro to be $1.03 when the payables are due. What is the total amount Bulldog will pay for the €125,000, including the option premium?

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Answer #1

as the strike price on Call option of $1.05 per unit is higher than spot rate of $1.03 per unit on 90 days from now. Bulldog will not exercise the call option and will buy Euro from market. premium paid on call option is an outflow irrespective of call exercising.

Thus Total amount Bulldog will pay = Payable * (Spot Rate after 90 Days from now + Premium paid on call option)

Total amount Bulldog will pay = 125000 * (1.03 + 0.03)

Total amount Bulldog will pay = 125000 * 1.06

Total amount Bulldog will pay = $132500

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