2-Currency Call Option Premiums. List the factors that affect currency call option premiums and briefly explain the relationship that exists for each. Do you think an at-the-money call option in euros has a higher or lower premium than an at-the-money call option in Mexican pesos (assuming the expiration date and the total dollar value represented by each option are the same for both options)? The factors are listed: The higher the existing spot rate relative to the strike price, the _______ is the call option value, other things equal. The longer the period prior to the expiration date, the ________ is the call option value, other things equal. The greater the variability of the currency, the greater is the call option value, other things equal. The at-the-money call option in euros should have a _____ premium because the euro should have less volatility than the peso (assuming that the expected volatility of the euro is lower than that of the peso).
|Greater, greater, lower|
|Greater, greater, higher|
|Lesser, greater, higher|
3-Currency Options. Differentiate between a currency call option and a currency put option. Complete this sentence: A currency call option provides the _____ to ______a specified currency at a specified price within a specified period of time. A currency put option provides the _____to _____a specified currency for a specified price within a specified period of time.
Obligation, purchase, obligation, sellRight, purchase, right, sellObligation, sell, obligation, purchase
5-Hedging With Currency Derivatives. Assume that U.S. firms that have no other foreign transactions anticipate the forward purchase transaction. What are possible ways to hedge the transactions according to the following scenario? Yale Corp. has a subsidiary in Australia that will be remitting funds to the U.S. parent.Forward sale, sell futures, purchase putsForward purchase, buy futures, purchase calls
Forward purchase, buy futures, purchase puts