You are the treasurer of Montana Corporation and must decide how to hedge (if at all) future payables of 1,000,000 Japanese yen 90 days from now. Call options are available with a premium of $.01 per unit and an exercise price of $.01031 per Japanese yen. The forecasted spot rate of the Japanese yen in 90 days is:
$$\begin{array} { c c }
\text { Future Spot Rate } & \text { Probability } \
\$ .01035 & 20 \% \
\$ .01032 & 20 \% \
\$ .01030 & 30 \% \
\$ .01029 & 30 \%
\end{array}$$
The 90-day forward rate of the Japanese yen is $.01033.
What is the probability that the call option will be exercised (assuming Montana purchased it)?

Question

You are the treasurer of Montana Corporation and must decide how to hedge (if at all) future payables of 1,000,000 Japanese yen 90 days from now. Call options are available with a premium of $.01 per unit and an exercise price of $.01031 per Japanese yen. The forecasted spot rate of the Japanese yen in 90 days is:
$$\begin{array} { c c } 
\text { Future Spot Rate } & \text { Probability } \
 \$ .01035 & 20 \% \
\$ .01032 & 20 \% \
\$ .01030 & 30 \% \
\$ .01029 & 30 \%
\end{array}$$
The 90-day forward rate of the Japanese yen is $.01033.
What is the probability that the call option will be exercised (assuming Montana purchased it)?

Quizplus · Accepted Answer

The Answer of You are the treasurer of Montana Corporation and must decide how to hedge (if at all) future payables of 1,000,000 Japanese yen 90 days from now. Call options are available with a premium of $.01 per unit and an exercise price of $.01031 per Japanese yen. The forecasted spot rate of the Japanese yen in 90 days is:
$$\begin{array} { c c } 
\text { Future Spot Rate } & \text { Probability } \
 \$ .01035 & 20 \% \
\$ .01032 & 20 \% \
\$ .01030 & 30 \% \
\$ .01029 & 30 \%
\end{array}$$
The 90-day forward rate of the Japanese yen is $.01033.
What is the probability that the call option will be exercised (assuming Montana purchased it)?

You Are the Treasurer of Montana Corporation and Must Decide