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Question
In April 2012, an FI bought a one-month sterling T-bill paying 100 million in May 2012. The FI's liabilities are in dollars, and current exchange rate is $1.6401/1. The bank can buy one-month options on sterling at an exercise price of $1.60/1. Each contract has a size of 31,250, and the contracts currently have a premium of $0.014 per . Alternatively, options on foreign currency futures contracts, which have a size of 62,500, are available for $0.0106 per .
How many options should the FI purchase, and what will be the cost?
A. 1,600 contracts for $16.96.
B. 1,600 contracts for $1,060,000.
C. 3,200 contracts for $44.80.
D. 3,200 contracts for $1,400,000.
E. 3,200 contracts for $2,800,000.
Answer
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