Assume that smith corp. will need to purchase 200,000 british pounds in 90 days. a call option exists on british pounds with an exercise price of $1.68, a 90-day expiration date, and a premium of $.04. a put option exists on british pounds with an exercise price of $1.69, a 90-day expiration date, and a premium of $.03. smith corporation plans to purchase options to cover its future payables. it will exercise the option in 90 days (if at all). it expects the spot rate of the pound to be $1.76 in 90 days. determine the amount of dollars it will pay for the payables, including the amount paid for the option premium.
a. $344,000
b. $343,765
c. $344,998
d. $347,000

maximum amount in dollar is payable = $344000

so correct option is a. $344,000

Explanation:

solution

we find here premium that is paid here

premium paid = 200000 pounds ×  $0.04

premium paid = 8000

and

amount payable in Dollar for 200000 pounds is

amount payable in Dollar = 200000 × $1.68

amount payable in Dollar = $336000

so whatever is happen in market

maximum amount in dollar is payable is

maximum amount in dollar is payable = $336000 + $8000

maximum amount in dollar is payable = $344000

so correct option is a. $344,000

1. True - Everything shifts up (higher) as there is more supply and more demand. Imagine if you have a graph with the x-axis being your supply and the y-axis your demand, then the point of equilibrium (meaning the demand & supply cross) will be higher if both increase.

2. False - As the intensity of the demand alone did not increase, because there is no new shortage of supply. So the price will remain the same. (actually in a more complex real life scenario, the price would also probably go down, because of economies of scale in providing goods in larger quantities

3. If the supply increases more, the price will go down as basically the sellers will increase but the buyers did not, so buyers will be able to say "wait a minute, I won't pay that much anymore, there is this other guy selling the same thing who has no buyer for it!'