Hedging with Currency Derivatives. A U.S. professional football team
1. Selling Currency Call Options. Mike Suerth sold a call option on Canadian dollars for $.01 per
unit. The strike price was $.76, and the spot rate at the time the option was exercised was $.82.
Assume Mike did not obtain Canadian dollars until the option was exercised. Also assume that
there are 50,000 units in a Canadian dollar option. What was Mike- net profit on the call option?
2. Hedging with Currency Derivatives. A U.S. professional football team plans to play an
exhibition game in the United Kingdom next year. Assume that all expenses will be paid by the
British government, and that the team will receive a check for 1 million pounds. The team anticipates
that the pound will depreciate substantially by the scheduled date of the game. In addition,
the National Football League must approve the deal, and approval (or disapproval) will not occur
for three months. How can the team hedge its position? What is there to lose by waiting three
months to see if the exhibition game is approved before hedging?
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