Question

no excel use. You believe the US dollar will depreciate relative to the peso and appreciate relative to the pound over the next 3 months. You decide to create a portfolio consisting of 4 three-month peso call contracts and 4 three-month pound put contracts to speculate on your belief. The call contracts have 5,000 pesos attached and have a strike price and premium of $.08 and $.03, respectively. The put contracts have 6,000 pounds attached and have a strike price and premium of $1.4 and $.06, respectively.

Find the value of your portfolio (in USD) if the spot rates at expiration are as follows: $.13/peso, $1.37/pound

-80 -1120 1120 320 None of the above

ii)Find the value of your portfolio (in USD) if the spot rates at expiration are as follows: $.07/peso, $1.3/pound. Round intermediate steps two four decimals and your final answer to two decimals.

9Exchange-traded currency options, like exchange-traded futures contracts, are highly standardized.

10An Australian company which has cash outflows denominated in New Zealand dollars would like to protect themselves against foreign exchange rate risk. Which of the following choices could the company pursue to achieve their goal?

Buy call options on New Zealand dollars.BBuy put options on New Zealand dollars. CSell a futures contract on New Zealand dollars. DAll of the above

Answer 1

1. calculating value for Pesso call contract. in order to find the profit/gain from call option we refer to following formula :

profit/loss = spot price - (strike price + premium)

1 pesos = 0.053 dollars

5000 pesos = $264.50

spot price = $ 650

strike price = $400

premium = $ 150

profit = $ 100

• calculating value for pounds put contract. for this the formula is :

profit/loss = breakeven point - stock price at expiration

breakeven price = strike price - premium paid.

strike price = $ 8400

premium paid = $ 360

* breakeven price = $ 8040

stock price = $ 8220

* loss = $ 180

2. call contract valuation at spot price $ 350

loss = $ 200

put contract valuation at spot price $ 7800

profit = $ 240

ans to ques number 10 - all of the above