What is the payoff on an average-rate pound call option against the dollar?
What will be an ideal response?
The payoff per pound on an average-rate pound call option against the dollar with a strike price of K($/£) is max[0, ($/£) – K($/£)], where ($/£) defines the average dollar-pound exchange rate between the initiation of the contract and the expiration date. To calculate the average exchange rate, the counterparties to the option contract must agree on a source for the data and a way of computing the average. They must decide on a time interval for the observations entering the average, which could be daily, weekly, or monthly, and they must decide whether the average is an arithmetic or geometric average. At the maturity of an average-rate option, the seller of the option settles the contract by delivering the dollar value of the option payoff to the buyer. Because an average of future exchange rates is less volatile than the future spot rate at maturity, average-rate options are less expensive than standard European options.
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If an income property is valued at $100,000 based on an 8% capitalization rate, what would be the value of the property if a 10% return is required:
A: $8,000; B: $10,000; C: $80,000; D: $100,000.
An important motive for direct foreign investment is to
A) gain entry to markets with economies growing faster than the U.S. B) insulate the firm from fluctuations in the value of the dollar. C) diversify political risks. D) increase a project's NPV by using lower foreign discount rates.