In April 2016,an FI Bought a One-Month Sterling T-Bill Paying

In April 2016,an FI bought a one-month sterling T-bill paying £100 million in May 2016.The FI's liabilities are in dollars,and current exchange rate is $1.6401/£1.The bank can buy one-month options on sterling at an exercise price of $1.60/£1.Each contract has a size of £31,250,and the contracts currently have a premium of $0.014 per £.Alternatively,options on foreign currency futures contracts,which have a size of £62,500,are available for $0.0106 per £.

How many options should the FI purchase,and what will be the cost?

A) 1,600 contracts for $16.96.
B) 1,600 contracts for $1,060,000.
C) 3,200 contracts for $44.80.
D) 3,200 contracts for $1,400,000.

Correct Answer:

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