1. A U.S. firm would need to pay £ 5,000,000 six months later. The firm could use a __________ option on the £ as insurance to establish a ceiling price (maximum price) on the dollar cost of £. If the American firm uses an option with an exercise price of £1 = $1.30 and a premium of $0.04 per £, the ceiling price would be __________________.
A) call; $1.26/£
B) call; $1.34/£
C) call; $1.30/£
D) put; $1.26/£
E) put; $1.34/£
2. The current spot exchange rate is $1.50 = €1.00 and the three-month forward rate is $1.60 = €1.00. Consider a three-month American put option on €62,500 with a strike price of $1.55 = €1.00. If you pay an option premium of $5,000 to buy this put, at what exchange rate will you break-even?
A) $1.47 = €1.00
B) $1.50 = €1.00
C) $1.58 = €1.00
D) $1.63 = €1.00
E) $1.68 = €1.00