Malibu, Inc., is a U.S. company that imports British goods. It plans to use call options to hedge payables of 120,000 pounds in 90 days. Three call options are available that have an expiration date 90 days from now. Fill in the number of dollars needed to pay for the payables (including the option premium paid) for each option available under each possible scenario in the following table. Round your answers to the nearest dollar.
| SCENARIO | SPOT RATE OF POUND 90 DAYS FROM NOW |
EXERCISE PRICE = $1.72; PREMIUM = $0.09 |
EXERCISE PRICE = $1.76; PREMIUM = $0.05 |
EXERCISE PRICE = $1.80; PREMIUM = $0.02 |
| 1 | $1.64 | $ | $ | $ |
| 2 | $1.69 | $ | $ | $ |
| 3 | $1.74 | $ | $ | $ |
| 4 | $1.79 | $ | $ | $ |
| 5 | $1.84 | $ | $ | $ |
If each of the five scenarios had an equal probability of occurrence, which option would you choose? Explain.
The option with the $ -Select-0.020.050.09Item 16 premium is slightly better than the other two options, on average.
