Suppose the current spot rate is $1.29/€. What is your payoff if you purchase a down-and-in put option on the euro with a strike price of $1.31/€, a barrier of $1.25/€, and a maturity of 2 months? When would someone want to do this?
What will be an ideal response?
For a down-and-in option, the exchange rate must first cross the barrier to activate the contract. Then, the buyer of the option has the right to exercise at maturity. So, the payoff on the option described above is max[0, $1.31/€ - S(T,$/€)], where S(T,$/€) is the exchange rate at maturity, but only if the exchange rate falls from its current value of $1.29/€ to $1.25/€ sometime during the 2 months between the initiation of the contract and the maturity date. Such an option is less expensive than a standard put option. It might therefore be purchased by someone who is bearish on the euro, believes initial volatility in the market will activate the option with reasonably high probability, and wants to cut the cost of obtaining a relatively high payoff, even in the currency strengthens somewhat towards the end of the contract.
You might also like to view...
Explain the whole-channel view of the distribution process
What will be an ideal response?
A common myth about entrepreneurship is that "Any entrepreneur with a good idea can ________ to fund his/her business."
A. use a skunkworks B. go public C. use formal control systems D. start a franchise E. raise venture capital
A revolving credit agreement is a form of financing consisting of short-term, unsecured promissory notes issued by firms with a high credit standing
Indicate whether the statement is true or false
Which of the following will enforce business rules vital to an organization's success and often require more insight and knowledge than relational integrity constraints?
A. Quality business constraints B. Critical web constraints C. Web integrity constraints D. Business critical integrity constraints