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Consider an American call option on one Mercury Corp share. The current Mercury Corp stock price is $105.00 and the stock is expected to pay a dividend of $7.74 per share in 1 year’s time. The strike price of the option is $110.00, the risk-free rate is 10% per annum, the volatility is 40% per annum and there is 2 years to maturity.

by | Jun 18, 2022 | Finance | 0 comments

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Q1
Consider an American call option on one Mercury Corp share. The current Mercury Corp stock price is $105.00 and the stock is expected to pay a dividend of $7.74 per share in 1 year’s time. The strike price of the option is $110.00, the risk-free rate is 10% per annum, the volatility is 40% per annum and there is 2 years to maturity.
(a) Calculate the current value of the option using Black’s American Option Pricing Model.
(b) We know that Black’s American Option Pricing Model only gives an approximate value for the option. What does your answer in part (a) imply about the exact value of the option?
Q2
Assume the spot U.S. dollar–Canadian dollar exchange rate is 1 CAD = 0.7804 USD, the risk-free rate in the U.S. is 2% per annum, the risk-free rate in Canada is 5% per annum and the volatility of the spot U.S. dollar–Canadian dollar exchange rate is 30% per annum.
Calculate the CAD value of a one-year European call option on one USD with a strike of CAD 1.4600
Q3
Assume the current spot U.S. dollar–U.K. pound exchange rate is £ 1 = $ 1.2500 A U.S. exporter has a contract to sell £ 4 million of goods at the end of the year – that is, the exporter will receive a fixed amount of £ 4 million at the end of the year from selling the goods at that time. The exporter is concerned that the pound may depreciate against the dollar between now and then.
(a) What should the exporter do now ?
(b) What is the outcome to the exporter if the exchange rate at the end of the year is £ 1 = $ 1.5000 ?

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