Revision Problem For Final Exam INS3032 2017 [PDF]

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Revision problem for INS3032 1.Apple will make a payment totaling £1.875 million next month to British suppliers. It can buy pound call options with a strike price of $1.64 at a premium of 3.0 cents per pound. The spot price of the pound is currently $1.65, and the pound is expected to trade in the range of $1.62 to $1.70. Apple also can take a long position in the pound futures contract with futures price at $1.65. Apple's treasurer believes that the most likely price of the pound in 30 days will be $1.68.

a.

How many options and futures contracts will Apple need to protect its payment? Each contract size is £31,250 for options and £62,500 for futures and calculate the breakeven point (5 points)

b.

Diagram Apple's profit and loss associated with the call option position and futures position within its range of expected exchange rates. Ignore transaction costs and margins.( 5 points)

c.

Calculate what Apple would gain or lose on the option within the range of expected future exchange rates at three points: $1.63, $1.65 & $1.70.( 10 points)

2. Apex Corporation must pay its Japanese supplier ¥125 million in three months. It is thinking of buying 20 yen call options (contract size is ¥6.25 million) at a strike price of $0.00800 in order to protect against the risk of a rising yen. The premium is 0.015 cents per yen. Alternatively, Apex could buy 10 three-month yen futures contracts (contract size is ¥12.5 million) at a price of $0.007940 per yen. The current spot rate is ¥1 = $0.007823. Suppose Apex's treasurer believes that the most likely value for the yen in 90 days is $0.007900, but the yen could go as high as $0.008400 or as low as $0.007500.

a.

What is Apex's break-even future spot price on the option contract? On the futures contract?

b. Diagram Apex's gains and losses on the call option position and the futures position within its range of expected prices (see Exhibit 8.4). Ignore transaction costs and margins c. Calculate what Apex would gain or lose on the option and futures positions if the yen settled at its most likely value 3. 11. James Clark is a foreign exchange trader with Citibank. He notices the following quotes.

Spot exchange rate

SFr1.2051/$

Six-month forward exchange rate

SFr1.1922/$

Six-month $ interest rate

2.5% per year

Six-month SFr interest rate

2.0% per year

a. Is the interest rate parity holding? You may ignore transaction costs. Is there an arbitrage opportunity? If yes, show what steps need to be taken to make arbitrage profit. Assuming that James Clark is authorized to work with $1,000,000, compute the arbitrage profit in dollars 4. The one-year interest rate in the U.S. is i$ = 2% and in the euro zone the one-year interest rate is i€ = 6%. The spot exchange rate is $1.25 = €1.00 and the one-year forward exchange rate is $1.20 = €1.00. Show how to realize a certain profit via covered interest arbitrage ( Start with $1,000,000 or €800,000) ( lãi 2000 eur hay là 2400 dollar) 5. Assume today’s settlement price on a CME EUR futures contract is $1.3140/EUR. You have a short position in one contract. Your performance bond account currently has a balance of $1,700. The next three days’ settlement prices are $1.3126, $1.3133, and $1.3049. Calculate the changes in the performance bond account from daily marking-to-market and the balance of the performance bond account after the third day.EUR125,000 is the contract size of one EUR contract. 6. Do problem 5 again assuming you have a long position in the futures contract.