Wesfarmers has developed the following probability distribution for the spot rate of the Indian rupee (INR) against the Australian dollar (A$) in six months to buy call options on INR1

Finance Dec 01, 2020

Wesfarmers has developed the following probability distribution for the spot rate of the Indian rupee (INR) against the Australian dollar (A$) in six months to buy call options on INR1.36 million with an exercise price of A$0.3295 and a premium of A$0.0388.

· A$0.2342 [38 per cent probability]

· A$0.4351 [28 per cent probability]

· A$0.5696 [(100-38-28) per cent probability]

What is the expected value of the cash to be paid in A$ for the call option hedge? (enter the whole number without sign and symbol)

Expert Solution

Scenario (1)	Spot rate after 6 Month (2)	Probability (3)	Option Settlement(4) (Max (SR - 0.3295 , 0)	Net Cost (5) = (2) - (4)	Expected Rate (6) = (3)*(5)
1	0.2342	0.38	Lapse	0.2342	0.088996
2	0.4351	0.28	0.1056	0.3295	0.09226
3	0.5696	0.34	0.2401	0.3295	0.11203
					0.293286

Net cost = Expected cost + Premium cost

= 1360000 * 0.293286 + 1360000* 0.0388

= A$451636.96

Archived Solution

Unlocked Solution

You have full access to this solution. To save a copy with all formatting and attachments, use the button below.

Already a member? Sign In

Important Note: This solution is from our archive and has been purchased by others. Submitting it as-is may trigger plagiarism detection. Use it for reference only.

For ready-to-submit work, please order a fresh solution below.

Or get 100% fresh solution

Get Custom Quote