finance questions on black scholes and hedging?
Problem 1
Omar is considering purchasing a call option on Pandulum shares which are currently trading at per share. The option expires in 50 days. Omar can invest his money at the risk free rate of 5%. The call’s exercise price is . The variance on Pendulum shares is .09.
Required
(a)Determine the current market price of the call using the Black-Scholes formula and the time value of the call option.
Problem 3
It is October 15th today. XYZ Corporation, a US based company must pay in May of next year, million Canadian to HFX Inc. a Canadian company located north of Regina.
Currency future contracts with a size of C0,000 have delivery dates in February, May and November. Currency options with a size of C,000 have expiration dates in February, May, August and November.
Price quotes for futures contracts on Canadian dollars on October 15 are:
Expiration Settlement
November0.6436
February0.6423
May0.6402
Price quotes for call options on the Canadian dollar are:
Series November February May
US{content}.6500/C{content}.030.050.07
US{content}.6800/C{content}.020.040.05
Required
(a)What risk does XYZ Corporation face and how can the company hedge its risk using options and futures? Be specific in identifying the various hedging strategies this company may use
(b)If the value of the Canadian dollar goes up to US{content}.67/C$, determine the cost in US$ and the effective rate paid if XYZ Corporation hedges with futures.
(c)If the value of the Canadian dollar goes down to US{content}.61/C$, determine the cost in US$ and the effective rate paid if Little Corporation hedges with call options
please show calculations. ANY help is appreciated. thanks