In april 2016 an fi bought a one-month sterling t-bill, Ask an Expert

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In April 2016, an FI bought a one-month sterling T-bill paying £100 million in May 2016. 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? Show all work and discuss.

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Financial Management, Finance

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