In June 2016,the spot exchange rate for the British Pound was $1.4255/£ .Suppose that at the same time Luther Industries entered into a contract to purchase goods with a price of £400,000 to be delivered in one year.There is a one-year call option contract available to Luther which will allow the company to purchase £10,000 for $1.50/£.If Luther purchases 40 option contracts,and the spot rate at the time the contract is due is $1.3465/£,how much will Luther pay for the goods?

Question

Quizplus · Accepted Answer

Luther will use the call options to purchase £400,000 at $1.50/£, resulting in a total cost of $600,000. However, since the spot rate is $1.3465/£, Luther will instead pay £400,000 * $1.3465/£ = $538,600 using the spot rate, which is cheaper than using the options.

In June 2016,the Spot Exchange Rate for the British Pound