FIN4604 exam2

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7. Assume that a speculator purchases a put option on British pounds (with a strike price of $1.50) for $.05 per unit. A pound option represents 31,250 units. Assume that at the time of the purchase, the spot rate of the pound is $1.51 and continually rises to $1.62 by the expiration date. The highest net profit possible on the option for the speculator based on the information above is:

B. -$1,562

16. The premium on a pound put option is $.03 per unit. The exercise price is $1.60. The break-even point is ________ for the buyer of the put, and ________ for the seller of the put. (Assume zero transactions costs and that the buyer and seller of the put option are speculators.)

e. $1.57; $1.57

17. You purchase a call option on pounds for a premium of $.03 per unit, with an exercise price of $1.64; the option will not be exercised until the expiration date, if at all. If the spot rate on the expiration date is $1.65, your net profit per unit is:

b. -$.02

18. You purchase a put option on Swiss francs for a premium of $.02, with an exercise price of $.61. The option will not be exercised until the expiration date, if at all. If the spot rate on the expiration date is $.58, your net profit per unit is:

e. None of the above.

19. You are a speculator who sells a call option on Swiss francs for a premium of $.06, with an exercise price of $.64. The option will not be exercised until the expiration date, if at all. The spot rate of the Swiss franc is $.69 on the expiration date, your net profit per unit is:

c. $.01

20. You are a speculator who sells a put option on Canadian dollars for a premium of $.03 per unit, with an exercise price of $.86. The option will not be exercised until the expiration date, if at all. If the spot rate of the Canadian dollar is $.78 on the expiration date, your net profit per unit is:

e. None of the above.

24 A U.S. corporation has purchased currency put options to hedge a 100,000 Canadian dollar (C$) receivable. The premium is $.01 and the exercise price of the option is $.75. If the spot rate at the time of maturity is $.85, what is the net amount received by the corporation if it acts rationally?

84,000

25 A U.S. corporation has purchased currency call options to hedge a 62,500 British pounds payable. The premium is $.02 per unit and the exercise price of the option is $1.50. If the spot rate of the pound at maturity is $1.65, what is the total amount paid by the corporation if it acts rationally?

$95,000

26 Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge your position by selling Japanese yen forward. The current spot rate of the yen is $.0089, while the forward rate is $.0095. If the spot rate turns out to be $.0090 in 60 days, how many dollars will you receive for the 5,000,000 yen at that time?

d. $47,500

36 Assume the bid rate of a New Zealand dollar is $.33 while the ask rate is $.335 at Bank X. Assume the bid rate of the New Zealand dollar is $.32 while the ask rate is $.325 at Bank Y. Given this information what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?

a. $15,385

Assume the following information. You have $1,000,000 to invest.
Current spot rate of pound = $1.30
90-day forward rate of pound = $1.28
3-month deposit rate in U.S. = 2.25%
3-month deposit rate in U.K. = 4%
If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have after 90 days?

a. $1,024,000.

Assume the following information:
Current spot rate of New Zealand dollar = $.41
Forecasted spot rate of New Zealand dollar 1 year from now = $.43
One year forward rate of the New Zealand dollar = $.42
Annual interest rate on New Zealand dollars = 8%
Annual interest rate on U.S. dollars = 9%
Compute the return from covered interest arbitrage by a U.S. investor with $500,000 to invest.

e. 10.63%

If annualized nominal interest rates in the US and Switzerland are 12% and 8%
respectively and the 90-day forward rate for the Swiss franc is $1.0218, at what
current spot rate will interest rate parity hold?

. $1.0022

Assume the following information:
Spot rate today of Swiss franc = $.60
1-year forward rate as of today for Swiss franc = $.63
Expected spot rate 1 year from now = $.64
Rate on 1-year deposits denominated in Swiss francs = 7%
Rate on 1-year deposits denominated in U.S. dollars = 9%
From the perspective of a U.S. investor with $1,000,000, covered interest arbitrage would yield a rate of return of ________.

b. 12.35%

. Assume the following information. You have $1,000,000 to invest.
Current sport rate of pound = $1.60
90-day forward rate of pound = $1.57
3-month deposit rate in U.S. = 3%
3-month deposit rate in U.K. = 4%
If you use covered interest arbitrage for a 90-day investment, what will be the
amount of U.S. dollars you will have after 90 days?

a. $1,020,500.

Assume the following information:
Current spot rate of Australian dollar = $.64
Forecasted spot rate of Australian dollar 1 year from now = $.59
1-year forward rate of Australian dollar = $.62
Annual interest rate for Australian dollar deposit = 9%
Annual interest rate in U.S. = 6%
Given the above information, the return from covered interest arbitrage by a U.S.
investor with $500,000 to invest is: ________.

e. 5.59%

Given that annual deposit rates for Dollars and Euros are 6% and 4%
respectively for the next 5 years. If the current spot rate of the Euro is $1.4015,
obtain the implied rate for the Euro five years from now if International Fisher
Equation holds exactly.

a. $1.5415

Assume that during a given period the nominal interest rate in Cyprus was 7%
while the nominal interest rate in the US was 5%. The spot rate for the Cyprus
pound ($/CYP) started at $1.50. At the end of the period, according to the IFE,
the Cyprus pound should adjust to a new level of:

a. $1.47

Assume the following information:
U.S. deposit rate for 1 year = 11%
U.S. borrowing rate for 1 year = 12%
Swiss deposit rate for 1 year = 8%
Swiss borrowing rate for 1 year = 10%
Swiss forward rate for 1 year = $.40
Swiss franc spot rate = $.39
Also assume that a U.S. exporter denominates its Swiss exports in Swiss francs
and expects to receive SF600,000 in 1 year. Using the information above, what
will be the approximate value of these exports in 1 year in U.S. dollars given that
the firm executes a forward hedge?

c. $240,000

Assume the following information:
U.S. deposit rate for 1 year = 11%
U.S. borrowing rate for 1 year = 12%
New Zealand deposit rate for 1 year = 8%
New Zealand borrowing rate for 1 year = 10%
New Zealand dollar forward rate for 1 year = $.40
New Zealand dollar spot rate = $.39
Also assume that a U.S. exporter denominates its New Zealand exports in NZ$ and
expects to receive NZ$600,000 in 1 year. Using the information provided, what
will be the approximate value of these exports in 1 year in U.S. dollars given that
the firm executes a money market hedge?

d. $236,127

Use the following information to calculate the dollar cost of using a money market
hedge to hedge 200,000 pounds of payables due in 180 days. Assume the firm has
no excess cash. Assume the spot rate of the pound is $2.02, the 180-day forward rate
is $2.00, the British interest rate is 5%, and the U.S. interest rate is 4% over the 180-
day period.

. e. None of the above

. A MNC will receive SF1,000,000 in 30 days. Use the following information to
determine the total dollar amount received (after accounting for the option premium)
if the firm purchases and exercises a put option:
Exercise price = $.61
Premium = $.02
Spot rate = $.60
Expected spot rate in 30 days = $.56
30-day forward rate = $.62

590,000

Assume that Parker Company will receive SF200,000 in 360 days. Assume the
following interest rates:
U.S. Switzerland
360-day borrowing rate 7% 5% 360-day deposit rate 6% 4%
Assume the forward rate of the Swiss franc is $.50 and the spot rate of the Swiss franc is $.48. If Parker Company uses a money market hedge, it will receive ________ in 360 days.

$96,914

The forward rate of the Swiss franc is $.50. The spot rate of the Swiss franc is $.48. The following interest rates exist:
U.S Switzerland
360-day borrowing rate 7% 5% 360-day deposit rate 6% 4%
You need to pay a sum of SF200,000 in 360 days. If you use a money market hedge, the amount of dollars you need in 360 days is:

98,769

Your company will receive C$600,000 in 90 days. The 90-day forward rate for
Canadian dollar is $.80. If you use a forward hedge, you will receive:

480,000 in 90 days

83. A call option exists on British pounds with an exercise price of $1.60, 90-day
expiration date, and a premium of $.03 per unit. A put option also exists on British pounds with an exercise price of $1.60, 90-day expiration date, and a premium of $.02 per unit. You plan to purchase options to cover your future receivables of 700,000 pounds in 90 days. You will exercise the option in 90 days (if at all). You observe the spot rate of the pound to be $1.57, 90 days later. Determine the amount of dollars to be received, after accounting for the option premium.

c. $1,106,000

Assume that Smith Corporation needs to purchase 200,000 British pounds in 90
days. A call option exists on British pounds with an exercise price of $1.68, 90-day
expiration date, and a premium of $.04. A put option also exists on British pounds,
with an exercise price of $1.69, 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). The spot rate of the pound turns out to be $1.76 in 90
days. Determine the dollar cost of the payables, including the cost of the option.

e. $344,000

Assume that IRP holds. The U.S. five-year interest rate is 5% per year while the
Mexican five-year rate is 8% per year. If today's spot rate of the peso is $.20, what is
the approximate five-year forecast of the peso's spot rate using the five year forward
rate?

e. $.174

A U.S. corporation has purchased currency put options to hedge a 100,000 Canadian dollar (C$) receivable. The premium is $.02 per unit and the exercise price of the option is $.94. If the spot rate at the time of maturity is $.99, what is the net amount received by the corporation if it acts rationally?

b. $97,000.

A U.S. corporation has purchased currency call options to hedge a 70,000 pound payable. The premium is $.02 and the exercise price of the option is $.50. If the spot rate at the time of maturity is $.65, what is the total amount paid by the corporation if it acts rationally?

d. $36,400

113. Your company expects to pay 5,000,000 Japanese yen 90 days from now. You decide to hedge your position by buying Japanese yen forward. The current spot rate of the yen is $.0089, while the forward rate is $.0095. You expect the spot rate in 90 days to be $.0090. How many dollars will you need to meet your obligation 90 days from now?

d. $47,500

A speculator sells a put option on Canadian dollars for a premium of $.03 per unit.
with an exercise price of $.98. The size of the option contact is C$50,000 and will
not be exercised until expiration if at all. If the spot rate for Canadian dollar is $.90
on at expiration, the net profit for the speculator is:

b. -$2500

If the interest rate on a deposit in the U.K. pound is 6% per year, and the pound is
expected to depreciate against the U.S. dollar by 2% , what does the interest rate
parity theory imply about the interest rate on a deposit in U.S. dollar?

b. 4%

Assume that the bid rate for Australian dollar $.60 while the ask rate is $.61 at Bank
A. Also assume that the bid rate for the Australian dollar is $.62 while the ask rate is
$.625 at Bank B. What would be your profit if have $100,000 and you execute
locational arbitrage ?

d. $1639.30

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