Question

1.

John sold a call option on Euro for $.04 per unit. The strike price was $1.30, and the spot rate at the time the option was exercised was $1.32. Assume John bought the Euro from the market if the option was exercised. Also assume that there are 100,000 units in a Euro option. What was John’s net profit on the call option?

Baylor Bank believes the New Zealand dollar will appreciate over the next 20 days from $.50 to $.53. The following annual interest rates apply:

Currency

Lending Rate

Borrowing Rate

Dollars

4.00%

5.90%

New Zealand dollar (NZ$)

5.50%

7.10%

2.

Baylor Bank has the capacity to borrow either NZ$10 million or USD 5 million. If Baylor Bank's forecast is correct, what will its dollar profit be from speculation over the 20 days period (assuming it does not use any of its existing consumer deposits to capitalize on its expectations)?

3.

Compute the bid/ask percentage spread for Mexican peso retail transactions in which the ask rate is $.0811 and the bid rate is $.0797.

4.

You observe following exchange rate quotations: $1 is equal to CNY 6.7021 Chinese yuan JPY1 Japanese yen equal to 0.0585 Chinese yuan. How many Japanese yen will you need to purchase 1 million US dollar?

5.

One year ago, you bought a put option on 500,000 euros with an expiration date of one year. You paid a premium on the put option of $.03 per unit. The exercise price was $1.30. Assume that one year ago, the spot rate of the euro was $1.29, the one-year forward rate exhibited a discount of 3%, and the one-year futures price was the same as the one-year forward rate. From one year ago to today, the euro depreciated against the dollar by 2 percent. Today the put option will be exercised (if it is feasible for the buyer to do so) a. Determine the total dollar amount of your profit or loss from your position in the put option. b.Now assume that instead of taking a position in the put option one year ago, you sold a futures contract on 500,000 euros with a settlement date of one year. Determine the total dollar amount of your profit or loss.

6.

The one-year forward rate of the British pound is quoted at $1.5316, and the spot rate of the British pound is quoted at $1.5426. The forward is present premium (or discount) at what annual percent rate?

7.

Bulldog, Inc., has sold Australian dollar put options at a premium of $.02 per unit, and an exercise price of $.89 per unit. It has forecasted the Australian dollar’s rate over the period of concern as $.86, $.87, $.88, $.89, $.91 and $.92. Determine the net profit (or loss) per unit to Bulldog, Inc., if Australia dollar each level occurs (show detailed analysis; follow the five steps in the teaching notes).   

8.

Assume that the United States invests in government and corporate securities of Country K. In addition, residents of Country K invest in the United States. Approximately $10 million worth of investment transactions occur between these two countries each year. The total dollar value of trade transactions per year is about $8 billion. This information is expected to also hold in the future.

Because your firm exports goods to Country K, your job as international cash manager requires you to forecast the value of Country K’s currency (the “krank”) with respect to the dollar. Explain how each of the following conditions will affect the value of the krank, holding other things equal. Then, aggregate all of these impacts to develop an overall forecast of the krank’s movement against the dollar.

a. The U.S. inflation has suddenly increased substantially, while Country K’s inflation remains low.

b. The U.S. interest rates have increased substantially, while Country K’s interest rates remain low. Investors of both countries are attracted to high interest rates.

c. The U.S. income level increased substantially, while Country K’s income level has remained unchanged.

d. The U.S. is expected to impose a small tariff on goods imported from Country K.

e. Combine all expected impacts to develop an overall forecast.

9. Last year a dollar was equal to 6 Swedish kronor, and a Polish zloty was equal to $.35. Today, the dollar is equal to 8 Swedish kronor and a Polish zloty is equal to $.44. By what percentage did the cross exchange rate of the Polish zloty in Swedish kronor (that is, the number of kronor that can be purchased with one zloty) change over the last year?

> Answer to question no 5 not given. Please share the same. Thank u.

Answer 1

1 John's net profit on the call option 1,00,000 No. of units in a Euro option contract Strike price Spot rate at the time option excercised $ 1.30 $ 1.32 Amount payble (1.32-1.30) Amount receivable on every call option sold Net amount receivable (0.04-0.02) Net profit on 100,000 call option 0.02 $.0.04 per unit 0.02 2,000 2 calculation of speculation profit over the 20 days period $50,00,000 $ 16,164 Borrow $ 5 million @ 5.9% interest rate P.A for 20 days Interest @5.9% p.a for 20 days (5000000*5.9%)*20/365 Amount payble after 20 days including loan amount (5000000+16164) $ 50,16,164 NZD 1,00,00,000 Convert $ 5 million into NZD @ .50 per dollar (5000000/0.5) Depositing 10 million NZD for 20 days @ 5.5% P.A (10000000*5.5%)*20/365 total NZD receivable after 20days (10000000+30136.98) NZD 30,137 NZD 1,00,30,137 $ 53,15,973 Convert NZD 10,030,137 into dollar @0.53 per NZD (10,030,137+531,597.26) Net profit ($ 5315973-5 5016164) $ 2,99,808

3 Computation of bid/ask percentage spread for Mexican peso Ask rate $.0811 Bid rate $.0797 Spread percentage (1.0811-.0797)/.0811)*100 1.73% 4 CNY/$ CNY/JPY JPY/S 6.7021 0.0585 114.565812

6 one-year forward rate of the British pound spot rate of the British pound Forward premium $ 1.5316 $ 1.5426 0.71% 9.02 per unit $.89 per unit 7 Bulldog, Inc., has sold Australian dollar put options at a premium Exercise price Spot price on average of 0.86+.87+.88+.89+.91+.92) Net profit on put option (.02+.89-89) 0.89 0.02 Exercise price Spot price Bulldog, Inc., has sold Australian dollar put options at a premium Put option(Excercised/lapse) Net profit (loss) in each case 0.89 0.89 0.89 0.89 0.89 0.89 0.86 0.87 0.88 0.89 0.91 0.92 0.02 0.02 0.02 0.02 0.02 0.02 Excercised Excercised Excercised Lapse Lapse -0.01 0.01 0.02 0.02 0.02 Excercised