Question

1. Jennifer Magnussen, a currency trader for Chicago-based Black River Investments, uses the following futures quotes on the British pound to speculate on the value of the British pound.

British Pound Futures, US$/pound (CME)

Contract = 62,500 pounds

Open

Maturity

Open

High

Low

Settle

Change

High

Interest

March

1.4246

1.4268

1.4214

1.4228

0.0032

1.4700

25,605

June

1.4164

1.4188

1.4146

1.4162

0.0030

1.4550

809

a) If Jennifer buys 3 March pound futures, and the spot rate at maturity is $1.4560/pound, what is the value of her position?

b) If Jennifer sells 12 June pound futures, and the spot rate at maturity is $1.3980/pound, what is the value of her position?

2. Airbus sold an aircraft, A400, to Delta Airlines, a U.S. company, and billed $30 million payable in six months. Airbus is concerned with the euro proceeds from international sales and would like to control exchange risk. The current spot exchange rate is $1.05/€ and six-month forward exchange rate is $1.10/€ at the moment. Airbus can buy a six-month put option on U.S. dollars with a strike price of €0.95/$ for a premium of €0.02 per U.S. dollar. Currently, six-month interest rate is 2.5% in the euro zone and 3.0% in the U.S.

  

c) If Airbus decides to hedge using put options on U.S. dollars, what would be the ‘expected’ euro proceeds from the American sale? Assume that Airbus regards the current forward exchange rate as an unbiased predictor of the future spot exchange rate.

d) At what future spot exchange rate do you think Airbus will be indifferent between the option and money market hedge?

Answer 1

AS per policy w have to answer first question

Answer-1)

Part-a)
Assumptions	Values
Pounds (₤) per futures contract	£62,500
Assumptions	Values
Pounds (₤) per futures contract	£62,500
Maturity month	March
Number of contracts	3
Did he buy or sell the futures	Buys
Ending spot rate ($/₤)	$1,4560
Pound futures contract, settle price ($	$1.4228
Spot - Futures	$0.0332
Value of position at maturity ($)	$6,225.00
(62,500 * 3 * 0.0332)
Part-b)
Assumptions	Values
Pounds (₤) per futures contract	£62,500
Maturity month	June
Number of contracts	12
Did he buy or sell the futures	sells
Ending spot rate ($/₤)	$1.3980
Pound futures contract, settle price ($	$1.4162
Spot - Futures	($0.0182)
Value of position at maturity ($)	$13,650.00
(62,500 * 12 * 0.0182)