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Principles of Finance

Problems

Principles of FinanceProblems
1 .
The Olive Orchard is a US retail outlet for high-quality olive oils. One of the major suppliers of olive oil for the company is a farm in Greece. The Olive Orchard must pay the Greek farm 5.00 euros per liter of olive oil it purchases. The Olive Orchard would like to purchase 7,000 liters of the Greek farm’s olive oil next year. Currently, it costs 0.900 euros to purchase 1 US dollar. If the exchange rate remains constant, how much will it cost the Olive Orchard (in US dollars) to purchase the 7,000 liters? If the exchange rate changes so that it costs 0.8599 euros to purchase 1 US dollar, how much will it cost to purchase the 7,000 liters of olive oil?
2 .
International Automobile Parts (IAP) holds a call option to purchase US dollars. The strike price on the call option is JPY 115/USD. IAP paid JPY 10 for the option. The spot price is JPY 120/USD, and the option expires today. Should IAP exercise the option? What is IAP’s payoff?
3 .
Global Producers (GP) holds a put option to sell US dollars. The strike price on the put option is JPY 114/USD. GP paid JPY 10 for the option. The spot price is JPY 120/USD, and the option expires today. Should GP exercise the option? What is GP’s payoff?
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