Igor Chouzhyk Home Assignment 6 1. Under what circumstances a U.S.

MNC may consider buying a call option on EUR for hedging? A US MNC would consider buying call options if they have business in Euros and would like to protect against a falling Euro. In case the Euro appreciates the MNC would exercise the option and would profit if the spot is higher than strike + premium. If it depreciates the MNC would not exercise and only lose the premium and buy at the spot. 2. Under what circumstances may an American speculator buy a put option on New Zealand dollars? The speculator would want to buy a put option on New Zealand dollars if he expects the NZ dollars to depreciate. In case they depreciate he would exercise the put option if the strike is higher than spot + premium. 3 Name the factors that influence currency call option premiums and briefly state in what way they influence those premiums. Do you think an at-the-money call option on EUR has a higher or lower premium than an at-the-money call option on GBP (presuming that the expiration date and the total dollar value represented by each option are the same for both options)? The premium is influenced by the intrinsic value, the higher the intrinsic value the higher the premium. Also the longer term has the higher price of the option. The currencies with higher volatility will also have higher premiums on call options because there is more possibility on being in-the-money. I think that the EUR call option would have a higher premium since Euro historically has a higher variance than pound. 4. How is the technical technique used to forecast currency rates. The technical technique looks at the historical prices and movements to forecast the future rates. By using this technique you look at the past patterns and then use those patterns to predict the future exchange rates. 5. A speculator sold a call option contract on Canadian dollars for $0.1 per unit. The strike price was $.76 and the spot rate at the time the option was exercised was $.82. He did not have Canadian dollars until the option was exercised. There are 50,000 Canadian dollars in that option contract. What was his net profit on the call option? (.82-.76-.01) x 50000= $2,500 profit

6. You wrote a put option contract on GBP for $.04 per unit. The strike price was $1.80 and the spot rate at the time the GBP option was exercised was $1.59. There are 31,250 GBP in this option contract. How much was your net profit on the put option?

(1.80-1.59-.04) x 31250= $5,525 profit

1.In

the United States, the expected annualized interest rate is 9 percent over the next four years. The expected annualized interest rate in Singapore over the next four years is 6 percent. Presuming that the IRP holds over the next four years, the spot rate of the SGD (Singapore dollar) is $.60, and that forward rate is used to forecast exchange rates, what do you forecast as the SGD spot rate in four years? What percent of appreciation/ depreciation of SGD does this forecast suggest over the next four years? ((1+.09)^4)/((1+.06)^4)=1.118104848 1 = .1181 or 11.81% appreciation ((1+.09)^4)/((1+.06)^4)=1.118104848 x .60= $.6709 8. As of today, assume the following information is available: U.S. Mexico Real rate of interest required by investors 3% 3% Nominal interest rate 10% 14% Spot rate $.19 One year forward rate $.17 a) Use the forward rate to forecast the percentage change in the Mexican peso over the next year. (0.17 0.19)/0.19= - 0.105263 or 10. 53% depreciation b) Use the differential in expected inflation to forecast the percentage change in the Mexican peso over the next year. (.10-.03) - (.14-.03) = -0.04 or -4% c) Use the spot rate to forecast the percentage change in the Mexican peso over the next year. No change, because .19 x (1 + (.03-.03))=.19.