Apple will make a payment totaling 1.875 million next month to British suppliers. It can buy pound call options with a strike price of $1.64 at a…
1.Apple will make a payment totaling £1.875 million next month to British suppliers. It can buy pound call options with a strike price of $1.64 at a premium of 3.0 cents per pound. The spot price of the pound is currently $1.65, and the pound is expected to trade in the range of $1.62 to $1.70. Apple also can take a long position in the pound futures contract with futures price at $1.65. Apple’s treasurer believes that the most likely price of the pound in 30 days will be $1.68.
a. How many options and futures contracts will Apple need to protect its payment? Each contract size is £31,250 for options and £62,500 for futures and calculate the breakeven point
b. Diagram Apple’s profit and loss associated with the call option position and futures position within its range of expected exchange rates. Ignore transaction costs and margins.
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Order Paper Nowc. Calculate what Apple would gain or lose on the option within the range of expected future exchange rates at three points: $1.63, $1.65 & $1.70