HKD4.03 at a premium of HKD0.02

A U.S. company is to sign a contract for 16 million HK dollars (HKD) that will be paid shortly in the future. Given the current exchange rate of HKD4.0 per U.S. dollar, this amount is consistent with the company’s target of 4 million U.S. dollars for its services. Assume it is July and that the contract amount will be paid on 30 September. The following September option quotes are available in the market today to help hedge against exchange rate risk:

  • A call option with a strike of HKD4.03 at a premium of HKD0.02
  • A put option with a strike of HKD4.03 at a premium of HKD0.01

Note that the option premiums are quoted in exchange rate terms. The size of each option contract is for 1,000,000 HKD. The board of directors of the company has requested that you answer the following questions:

a) Which option and position should be used in this hedging strategy? Using min or max notation, what is the payoff and profit function of the preferred option? (5 marks)

b) How many option contracts should the company buy or sell? (3 marks)

c) What is the cost of this hedging strategy in U.S. dollar terms? (4 marks)

d) Assume it is now September and the contract is paid as expected. What is the net cash flow implication of this contract to the company, assuming the HK dollar either appreciates to HKD3.5 or depreciates to HKD4.5 per U.S. dollar? Show all cash flows (in U.S. dollar terms) as well as the impact of the hedge in calculating the net cash flow for both scenarios. (10 marks)

e) Using an example, name a reason why an arbitrage opportunity could persist in the market?


Calculate the price of your order

Simple Order Process

Fill in the Order Form

Share all the assignment information. Including the instructions, provided reading materials, grading rubric, number of pages, the required formatting, deadline, and your academic level. Provide any information and announcements shared by the professor. Choose your preferred writer if you have one.

Get Your Order Assigned

Once we receive your order form, we will select the best writer from our pool of experts to fit your assignment.

Share More Data if Needed

You will receive a confirmation email when a writer has been assigned your task. The writer may contact you if they need any additional information or clarifications regarding your task

Let Our Essay Writer Do Their Job

Once you entrust us with your academic task, our skilled writers embark on creating your paper entirely from the ground up. Through rigorous research and unwavering commitment to your guidelines, our experts meticulously craft every aspect of your paper. Our process ensures that your essay is not only original but also aligned with your specific requirements, making certain that the final piece surpasses your expectations.

Quality Checks and Proofreading

Upon the completion of your paper, it undergoes a meticulous review by our dedicated Quality and Proofreading department. This crucial step ensures not only the originality of the content but also its alignment with the highest academic standards. Our seasoned experts conduct thorough checks, meticulously examining every facet of your paper, including grammar, structure, coherence, and proper citation. This comprehensive review process guarantees that the final product you receive not only meets our stringent quality benchmarks but also reflects your dedication to academic excellence.

Review and Download the Final Draft

If you find that any part of the paper does not meet the initial instructions, send it back to us with your feedback, and we will make the necessary adjustments.