CHAPTER 8 SUGGESTED ANSWERS TO CHAPTER 8 QUESTIONS


 Clara Murphy
 5 years ago
 Views:
Transcription
1 INSTRUCTOR S MANUAL: MULTINATIONAL FINANCIAL MANAGEMENT, 9 TH ED. CHAPTER 8 SUGGESTED ANSWERS TO CHAPTER 8 QUESTIONS. On April, the spot price of the British pound was $.86 and the price of the June futures contract was $.85. During April the pound appreciated, so that by May it was selling for $.9. What do you think happened to the price of the June pound futures contract during April? Explain. ANSWER. The price of the June futures contract undoubtedly rose. Here's why. The June futures price is based on the expectations of market participants as to what the spot value of the pound will be at the date of settlement in June. Since the spot value of the pound has risen in during April, the best prediction is that the future level of the pound will also be higher than it was on April. This expectation will undoubtedly be reflected in a June pound futures price that is higher on May than it was on April.. What are the basic differences between forward and futures contracts? Between futures and options contracts? ANSWER. The basic differences between forward and futures contracts are described in Section 3.. The most important difference between these two contracts and an options contract is that a buyer of a forward or futures contract must take delivery, while the buyer of an options contract has the right but not the obligation to complete the contract. 3. A forward market already existed, so why was it necessary to establish currency futures and currency options contracts? ANSWER. A currency futures market arose because private individuals were unable to avail themselves of the forward market. Currency options are partly a response to individuals and firms who would like to eliminate some currency risk while at the same time preserving the possibility of earning a windfall profit from favorable movements in the exchange rate. Options also enable firms bidding on foreign projects to lock in the home currency value of their bid without exposing themselves to currency risk if their bid is rejected. 4. Suppose that Texas Instruments must pay a French supplier 0 million in 90 days. a. Explain how TI can use currency futures to hedge its exchange risk. How many futures contracts will TI need to fully protect itself? ANSWER. TI can hedge its exchange risk by buying euro futures contracts whose expiration date is the closest to the date on which it must pay its French supplier. Given a contract size of 5,000, TI must buy 0,000,000/5,000 = 80 futures contracts to hedge its euro payable. b. Explain how TI can use currency options to hedge its exchange risk. How many options contracts will TI need to fully protect itself? ANSWER. TI can hedge its exchange risk by buying euro call options contracts whose expiration date is the closest to the date on which it must pay its French supplier. Given a contract size of 6,500, TI must buy 0,000,000/6,500 = 60 options contracts to hedge its payable. c. Discuss the advantages and disadvantages of using currency futures versus currency options to hedge TI's exchange risk. ANSWER. A futures contract is most valuable when the quantity of foreign currency being hedged is known, as in the case here. An option contract is most valuable when the quantity of foreign currency is unknown. Other things being equal, therefore, TI should use futures contracts to hedge its currency risk. However, TI must honor its futures contracts even if the spot rate at settlement is less than the futures price. In contrast, TI can choose not to exercise currency call options if the call price exceeds the spot price. Although this feature is an advantage of currency options, it is fully priced out in the market via the call premium. Hence, options are not unambiguously
2 CHAPTER 8: CURRENCY FUTURES AND OPTIONS MARKETS better than futures. In this case, since the quantity of the future French franc outflow is known, TI should use currency futures to hedge its risk. 5. Suppose that Bechtel Group wants to hedge a bid on a Japanese construction project. But because the yen exposure is contingent on acceptance of its bid, Bechtel decides to buy a put option for the 5 billion bid amount rather than sell it forward. In order to reduce its hedging cost, however, Bechtel simultaneously sells a call option for 5 billion with the same strike price. Bechtel reasons that it wants to protect its downside risk on the contract and is willing to sacrifice the upside potential in order to collect the call premium. Comment on Bechtel's hedging strategy. ANSWER. The combination of buying a put option and selling a call option at the same strike price is equivalent to selling 5 billion forward at a forward rate equal to the strike price on the put and call options. That is, Bechtel is no longer holding an option; it is now holding a forward contract. If the yen appreciates and Bechtel loses its bid, it will face an exchange loss equal to 5 billion x (actual spot rate  exercise price). ADDITIONAL CHAPTER 8 QUESTIONS AND ANSWERS. What is the last day of trading and the settlement day for the IMM Australian dollar futures for September of the current year? ANSWER. The last day of trading for the IMM Australian dollar futures for September will be the third Wednesday of September. The specific date depends on the particular year. For 00 it is September 9 and for 00 it is September 8. Settlement takes place each day.. Which contract is likely to be more valuable, an American or a European call option? Explain. ANSWER. The American call option is likely to be more valuable since it can be exercised at any time prior to maturity, unlike the European option which can be exercised only at maturity. The option to exercise early is valuable when interest rates on the two currencies differ. 3. In Exhibit 8.9, the value of the call option is shown as approaching its intrinsic value as the option goes deeper and deeper inthemoney or further and further outofthemoney. Explain why this is so. ANSWER. As the call option moves further outofthemoney, the chances that it will expire unexercised and worthless increase, bringing it closer to its intrinsic value of 0. Alternatively, as the option goes deeper inthemoney, the chance that the exchange rate will fall below the exercise price declines, increasing the probability that the option will be exercised eventually at a profit equal to its intrinsic value. 4. During September 99, options on ERM currencies with strike prices outside the ERM bands had positive values. At the same time, actual currency volatility was close to zero. a. Is there a paradox here? Explain. ANSWER. There is no paradox here. Although current volatility was almost zero, currency traders were betting that the ERM could not be maintained, which would lead to a jump in currency volatility. If the ERM broke up, there was a positive probability that ERM currency values would move outside the bands. Hence, it is not surprising that options on ERM currencies with strike prices outside the ERM bands had positive values. b. Why might actual currency volatility have been close to zero? What does a zero volatility imply about the value of currency options? ANSWER. Actual currency volatility was close to zero because of government intervention to maintain currency values within the established bands. However, a zero current volatility implies nothing about the value of currency options. What matters in pricing an option is the underlying asset's projected volatility over the life of the contract. If future volatility is expected to differ from current volatility, option prices will not reflect current volatility.
3 INSTRUCTOR S MANUAL: MULTINATIONAL FINANCIAL MANAGEMENT, 9 TH ED. c. What does the positive values of ERM options outside the bands tell you about the market's perceptions of the possibility of currency devaluations or revaluations? ANSWER. The market was clearly expecting currency movements beyond the established ERM bands. In other words, traders believed that currency devaluations or revaluations had a positive probability of occurring. Otherwise, the value of options with strike prices outside the ERM bands would have been insignificantly different from zero. SUGGESTED SOLUTIONS TO CHAPTER 8 PROBLEMS. On Monday morning, an investor takes a long position in a pound futures contract that matures on Wednesday afternoon. The agreedupon price is $.78 for 6,500. At the close of trading on Monday, the futures price has risen to $.79. At Tuesday close, the price rises further to $.80. At Wednesday close, the price falls to $.785, and the contract matures. The investor takes delivery of the pounds at the prevailing price of $.785. Detail the daily settlement process (see Exhibit 8.3). What will be the investor's profit (loss)? ANSWER Time Action Cash Flow Monday Investor buys pound futures None morning contract that matures in two days. Price is $.78. Monday Futures price rises to $.79. Investor receives close Contract is markedtomarket. 6,500 x ( ) = $65. Tuesday Futures price rises to $.80. Investor receives close Contract is markedtomarket. 6,500 x ( ) = $65. Wednesday Futures price falls to $.785. () Investor pays close () Contract is markedtomarket. 6,500 x ( ) = $ () Investor takes delivery of 6,500. () Investor pays 6,500 x.785 = $, Net profit is $, = $ Suppose that the forward ask price for March 0 on euros is $0.97 at the same time that the price of IMM euro futures for delivery on March 0 is $ How could an arbitrageur profit from this situation? What will be the arbitrageur's profit per futures contract (size is 5,000)? ANSWER. Since the futures price exceeds the forward rate, the arbitrageur should sell futures contracts at $0.945 and buy euro forward in the same amount at $0.97. The arbitrageur will earn 5,000( ) = $5 per euro futures contract arbitraged. 3. Suppose that DEC buys a Swiss franc futures contract (contract size is SFr 5,000) at a price of $0.83. If the spot rate for the Swiss franc at the date of settlement is SFr = $0.850, what is DEC's gain or loss on this contract? ANSWER. DEC has bought Swiss francs worth $0.850 at a price of $0.83. Thus, it has lost $0.005 per franc for a total loss of 5,000 x.005 = $65. 3
4 CHAPTER 8: CURRENCY FUTURES AND OPTIONS MARKETS 4. On January 0, Volkswagen agrees to import auto parts worth $7 million from the United States. The parts will be delivered on March 4 and are payable immediately in dollars. VW decides to hedge its dollar position by entering into IMM futures contracts. The spot rate is $0.8947/ and the March futures price is $0.900/. a. Calculate the number of futures contracts that VW must buy to offset its dollar exchange risk on the parts contract. ANSWER. Volkswagen can lock in a euro price for its imported parts by buying dollars in the futures market at the current March futures price of.09/$ (/0.900). This is equivalent to selling euro futures contracts. At that futures price, VW will sell 7,776,050 for $7 million. At 5,000 per futures contract, this would entail selling 6 contracts (7,776,050/5,000 = 6.) at a total cost of 7,750,000. b. On March 4, the spot rate turns out to be $0.895/, while the March futures price is $0.8968/. Calculate VW's net euro gain or loss on its futures position. Compare this figure with VW's gain or loss on its unhedged position. ANSWER. Under its futures contract, Volkswagen has agreed to sell 7,750,000 and receive $6,976,550 (7,750,000 x 0.900). On March 4, VW can close out its futures position by buying back 6 March euro futures contracts (worth 7,750,000). At the current futures rate of $0.8968/, VW must pay out $6,950,00 (7,750,000 x ). Hence, VW has a net gain of $6,350 ($6,976,550  $6,950,00) on its futures contract. At the current spot rate of $0.895/, this translates into a gain of 9, (6,350/0.895). Upon closing out the 6 futures contracts, VW will then buy $7 million in the spot market at a spot rate of $0.895/. Its net cost is 7,790,046.9 (7,000,000/ ,434.76). If VW had not hedged its import contract, it could have bought the $7 million on March 0 at a cost of 7,89,48.68 (7,000,000/0.895). This contrasts with a projected cost based on the spot rate on January 0th of 7,83,85.57 (7,000,000/0.8947). However, the latter cost is irrelevant since VW had no opportunity to buy March dollars at the January 0th spot rate of $0.8947/. By not hedging, VW would have paid an extra 9, for the $7,000,000 to satisfy its dollar liability, the difference between the cost of $7 million with hedging ( 7,790,046.9) and the cost without hedging ( 7,89,48.68). 5. Citigroup sells a call option on euros (contract size is 500,000) at a premium of $0.04 per euro. If the exercise price is $0.9 and the spot price of the euro at date of expiration is $0.93, what is Citigroup's profit (loss) on the call option? ANSWER. Since the spot price of $0.93 exceeds the exercise price of $0.9, Citigroup's counterparty will exercise its call option, causing Citigroup to lose per euro. Adding in the 4 call premium it received gives Citigroup a net profit of per euro on the call option for a total gain of.0 x 500,000 = $0,000. 4
5 INSTRUCTOR S MANUAL: MULTINATIONAL FINANCIAL MANAGEMENT, 9 TH ED. 6. Suppose you buy three June PHLX call options with a 90 strike price at a price of.3 ( / ). a. What would be your total dollar cost for these calls, ignoring broker fees? ANSWER. With each call option being for 6,500, the three contracts combined are for 87,500. At a price of.3 /, the total cost is therefore 87,500 x $0.03 = $4,3.50. b. After holding these calls for 60 days, you sell them for 3.8 ( / ). What is your net profit on the contracts assuming that brokerage fees on both entry and exit were $5 per contract and that your opportunity cost was 8% per annum on the money tied up in the premium? ANSWER. The net profit would be.5 / ( ) for a total profit before expenses of $,8.50 (0.05 x 87,500). Brokerage fees totaled $0 per contract or $30 overall. The opportunity cost would be $4,3.50 x 0.08 x 60/365 = $56.7. After deducting these expenses (which total $86.7), the net profit is $, A trader executes a "bear spread" on the Japanese yen consisting of a long PHLX 03 March put and a short PHLX 0 March put. a. If the price of the 03 put is.8 (00ths of / ), while the price of the 0 put is.6 (00ths of / ), what is the net cost of the bear spread? ANSWER. Going long on the 03 March put costs the trader 0.08 / while going short on the 0 March put yields the trader 0.06 /. The net cost is therefore 0.0 / ( ). On a contract of 6,50,000, this is equivalent to $ b. What is the maximum amount the trader can make on the bear spread in the event the yen depreciates against the dollar? ANSWER. To begin, it should be pointed out that the 03 March put gives the trader the right but not the obligation to sell yen at a price of.03 /. Similarly, the 0 March put gives the buyer the right but not the obligation to sell yen to the trader at a price of.0 /. If the yen falls to.0 / or below, the trader will earn the maximum spread of 0.0 /. After paying the cost of the bear spread, the trader will net / ( ), or $ on a 6,50,000 contract. c. Redo your answers to parts a and b assuming the trader executes a "bull spread" consisting of a long PHLX 97 March call priced at 0.03 / and a short PHLX 03 March call priced at /. What is the trader's maximum profit? Maximum loss? ANSWER. In this case, the trader will pay 0.03 / for the long 97 March call and receive / for the short 03 March call. The net cost to the trader, therefore, is 0.05 /, which is also the trader's maximum potential loss. At any price of.03 / or greater, the trader will earn the maximum possible spread of 0.06 /. After subtracting off the cost of the bull spread, the trader will net /, or $, per 6,50,000 contract. 8. Apex Corporation must pay its Japanese supplier 5 million in three months. It is thinking of buying 0 yen call options (contract size is 6.5 million) at a strike price of $ in order to protect against the risk of a rising yen. The premium is 0.05 cents per yen. Alternatively, Apex could buy 0 threemonth yen futures contracts (contract size is.5 million) at a price of $ per yen. The current spot rate is = $ Suppose Apex's treasurer believes that the most likely value for the yen in 90 days is $ , but the yen could go as high as $ or as low as $ a. 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. ANSWER. In all the following calculations, note that the current spot rate is irrelevant. When a spot rate is referred to, it is the spot rate in 90 days. If Apex buys the call options, it must pay a call premium of x 5,000,000 5
6 CHAPTER 8: CURRENCY FUTURES AND OPTIONS MARKETS = $8,750. If the yen settles at its minimum value, Apex will not exercise the option and it loses the call premium. But if the yen settles at its maximum value of $ , Apex will exercise at $ and earn $0.0004/ for a total gain of.0004 x 5,000,000 = $50,000. Apex's net gain will be $50,000  $8,750 = $3,50. PROFIT (LOSS) ON APEX CORPORATION'S FUTURES AND OPTIONS POSITIONS $60,000 $57,500 $40,000 $0,000 $3,5 0 Profit (loss) $ Yen price ($ omitted) ($0,000) ($8,750) Profit (loss) on call option position ($40,000) Profit (loss) on futures ($60,000) OPTION Inflow $,08,750 $,050,000 Outflow Call Premium $8,750 $8,7508,750 ,000,000 Exercise Cost ,000,0008,750 Profit $8,750 $8,750 $0 $3,50 FUTURES Inflow $937,500 $99,500 $,000,000 $,050,000 Outflow 99,50099,50099,50099,500 Profit $55,000 $0 $7,500 $57,500 As the diagram shows, Apex can use a futures contract to lock in a price of $ / at a total cost of x 5,000,000 = $99,500. If the yen settles at its minimum value, Apex will lose $ $ = $ / (remember it is buying yen at , when the spot price is only ), for a total loss on the futures contract of x 5,000,000 = $55,000. On the other hand, if the yen appreciates to $ , Apex will earn $ $ = $ / for a total gain on the futures contracts of x 5,000,000 = $57,500. b. Calculate what Apex would gain or lose on the option and futures positions if the yen settled at its most likely value. ANSWER. If the yen settles at its most likely price of $ , Apex will not exercise its call option and will lose the call premium of $8,750. If Apex hedges with futures, it will have to buy yen at a price of $ when the spot rate is $ This will cost Apex $ /, for a total futures contract cost of x 5,000,000 = $5,000. c. What is Apex's breakeven future spot price on the option contract? On the futures contract? 6
7 INSTRUCTOR S MANUAL: MULTINATIONAL FINANCIAL MANAGEMENT, 9 TH ED. ANSWER. On the option contract, the spot rate will have to rise to the exercise price plus the call premium for Apex to break even on the contract, or $ $ = $ In the case of the futures contract, breakeven occurs when the spot rate equals the futures rate, or $ d. Calculate and diagram the corresponding profit and loss and breakeven positions on the futures and options contracts for the sellers of these contracts. ANSWER. The sellers' profit and loss and breakeven positions on the futures and options contracts will be the mirror image of Apex's position on these contracts. For example, the sellers of the futures contract will breakeven at a future spot price of = $ , while the options sellers will breakeven at a future spot rate of = $ Similarly, if the yen settles at its minimum value, the options sellers will earn the call premium of $8,750 and the futures sellers will earn $55,000. But if the yen settles at its maximum value of $ , the options sellers will lose $3,50 and the futures sellers will lose $57,500. ADDITIONAL CHAPTER 8 PROBLEMS AND SOLUTIONS. On Monday morning, an investor takes a short position in a euro futures contract that matures on Wednesday afternoon. The agreedupon price is $ for 5,000. At the close of trading on Monday, the futures price has fallen to $ At Tuesday close, the price falls further to $0.99. At Wednesday close, the price rises to $0.940, and the contract matures. The investor delivers the euros at the prevailing price of $ Detail the daily settlement process (see Exhibit 8.). What will be the investor's profit (loss)? ANSWER Time Action Cash Flow Monday Investor sells euro futures None morning contract that matures in two days. Price is $ Monday Futures price falls to $ Investor receives close Contract is markedtomarket. 5,000 x ( ) = $ Tuesday Futures price falls to $0.99. Investor receives close Contract is markedtomarket. 5,000 x ( ) = $300. Wednesday Futures price rises to $ () Investor pays 5,000 x ( ) close () Contract is markedtomarket. = $,6.50. () Investor takes delivery of _5,000 () Investor pays 5,000 x = $7,750 Net loss is $, $ = $65.. On August 6, you go long one IMM yen futures contract at an opening price of $0.008 with a performance bond of $4,590 and a maintenance performance bond of $3,400. The settlement prices for August 6, 7, and 8 are $0.0079, $ , and $ , respectively. On August 9, you close out the contract at a price of $ Your roundtrip commission is $3.48. a. Calculate the daily cash flows on your account. Be sure to take into account your required performance bond and any performance bond calls. 7
8 CHAPTER 8: CURRENCY FUTURES AND OPTIONS MARKETS ANSWER Time Action Cash Flow on Contract August 6 Sell one IMM yen futures Performance bond of $4,590. morning contract. Price is $ August 6 Futures price falls to $ You pay out close Contract is markedtomarket.,500,000 x ( ) = $,65.00 August 7 Futures price rises to $ You receive close Contract is markedtomarket.,500,000 x ( ) = +$6, August 8 Futures price rises to $ You receive close Contract is markedtomarket.,500,000 x ( ) = +$6,5.00 August 9 Futures price falls to $ You pay out close () Contract is markedtomarket. (),500,000 x ( ) = $4,65.00 () You close out the contract () None You pay out a roundtrip commission = $ Net gain on the futures contract = $5,593.5 Your performance bond calls and cash balances as of the close of each day were as follows: August 6 With a loss of $,65, your account balance falls to $,965 ($4,590 $,65). You must add $,65 ($4,590  $,65) to your account to restore it to the performance bond requirement of $4,590. With subsequent gains on the futures contract, you have no further margin calls. b. What is your cash balance with your broker on the morning of August 0? ANSWER. As shown in part a, your net profit was $5, Add to this the $4,590 performance bond and the further margin of $,65 paid in on August 6 and the amount in your account on the morning of August 0 is $,808.5 ($5, $4,590 + $,65). 3. Biogen expects to receive royalty payments totaling.5 million next month. It is interested in protecting these receipts against a drop in the value of the pound. It can sell 30day pound futures at a price of $.653 per pound or it can buy pound put options with a strike price of $.66 at a premium of.0 cents per pound. The spot price of the pound is currently $.6560, and the pound is expected to trade in the range of $.650 to $.700. Biogen's treasurer believes that the most likely price of the pound in 30 days will be $ a. How many futures contracts will Biogen need to protect its receipts? How many options contracts? ANSWER. With a futures contract size of 6,500, Biogen will 0 futures contracts to protect its anticipated royalty receipts of.5 million. Since the option contract size is half that of the futures contract, or 3,50, Biogen will need 40 put options to hedge its receipts. b. Diagram Biogen's profit and loss associated with the put option position and the futures position within its range of expected exchange rates (see Exhibit 8.6). Ignore transaction costs and margins. 8
9 INSTRUCTOR S MANUAL: MULTINATIONAL FINANCIAL MANAGEMENT, 9 TH ED $3,875 GAIN (LOSS) ON BIOGEN'S FUTURES AND OPTIONS POSITIONS 0000 Gain (loss) on futures position $.6 $.63 $.64 $.65 $.66 $.67 $.68 $.69 $.70 $ Gain (loss) on put option position ($5,000) Pound price ($6,5) OPTION Inflow Outflow Put premium Exercise cost Profit.650 $,076,5005,000 ,03,50 $0, $,076,5005,000 ,050,000 $, $,076,5005,000 ,064,5 $, ,000 $5, ,000 $5,000 FUTURES Inflow Outflow Profit $,064,5 ,03,50 $3,875 $,064,5 ,050,000 $4,5 $,064,5 ,064,5 $0 $,064,5 $7,500 $,064,5 ,6,50 $6,5 c. Calculate what Biogen would gain or lose on the option and futures positions within the range of expected future exchange rates and if the pound settled at its most likely value. ANSWER. If Biogen buys the put options, it must pay a put premium of 0.0 x,50,000 = $5,000. If the pound settles at its maximum value, Biogen will not exercise and it loses the put premium. But if the pound settles at its minimum of $.650, Biogen will exercise at $.66 and earn $0.036/ or a total of x,50,000 = $45,50. Biogen's net gain will be $45,50  $5,000 = $0,50. With regard to the futures position, Biogen will lock in a price of $.653/ for total revenue of $.653 x,50,000 = $,064,5. If the pound settles at its minimum value, Biogen will have a gain per pound on the futures contracts of $ $.650 = $0.063/ (remember it is selling pounds at a price of $.653 when the spot price is only $.650) for a total gain of x,50,000 = $3,875. On the other hand, if the pound 9
10 0 INSTRUCTORS MANUAL: MULTINATIONAL FINANCIAL MANAGEMENT, 7TH ED. appreciates to $.7000, Biogen lose $ $.653 = $0.0497/ for a total loss on the futures contract of x,50,000 = $6,5. If the pound settles at its most likely price of $.6400, Biogen will exercise its put option and earn $.66  $.6400 = $0.0/, or $6,500. Subtracting off the put premium of $5,000 yields a net gain of $,500. If Biogen hedges with futures contracts, it will sell pounds at $.653 when the spot rate is $ This will yield Biogen a gain of $0.03/ for a total gain on the futures contract equal to 0.03 x,50,000 = $4,5. d. What is Biogen's breakeven future spot price on the option contract? On the futures contract? ANSWER. On the option contract, the spot rate will have to sink to the exercise price less the put premium for Biogen to break even on the contract, or $.66  $0.0 = $.64. In the case of the futures contract, breakeven occurs when the spot rate equals the futures rate, or $.653. e. Calculate and diagram the corresponding profit and loss and breakeven positions on the futures and options contracts for those who took the other side of these contracts. ANSWER. As in the case of Apex, the sellers' profit and loss and breakeven positions on the futures and options contracts will be the mirror image of Biogen's position on these contracts. For example, the sellers of the futures and options contracts will break even at future spot prices of $.653/ and $.64/, respectively. Similarly, if the pound falls to its minimum value, the options sellers will lose $0,50 and the futures sellers will lose $3,875. But if the pound hits its maximum value of $.700, the options sellers will earn $5,000 and the futures sellers will earn $6,5. SUGGESTED SOLUTIONS TO APPENDIX 8A PROBLEMS. Assume that the spot price of the British pound is $.55, the annualized 30day sterling interest rate is 0%, the annualized 30day U.S. interest rate is 8.5%, and the annualized standard deviation of the dollar:pound exchange rate is 7%. Calculate the value of a 30day PHLX call option on the pound at a strike price of $.57. ANSWER. To apply Equation 8. to value this option, we must first estimate B(t,0.0833) and B*(t,0.0833), since T = (one month equal years). Given the annualized onemonth interest rates of 8.5% and 0%, the onemonth U.S. and U.K. interest rates are % (8.5/) and % (0/), respectively. The associated bond prices are B(t,0.0833)= = * B (t,0.0833)= = Substituting in the values for B and B* along with those for S (.55), X (.57), and σ (0.7) in Equation 7., we can calculate 0
11 INSTRUCTOR S MANUAL: MULTINATIONAL FINANCIAL MANAGEMENT, 9 TH ED. * ln( SB /XB)+ 0.5σ T ln(.55x0.9974/.57 x0.9997)+ 0.5(0.7 ) (0.0833) d = = = σ T d = d σ T = = Using NORMDIST in Excel yields computed values of N(0.699) = and N(0.306) = Applying Equation 7., we can now calculate the value of the onemonth pound call option: * C(t) = N( d ) x S(t) x B (t,t) N( d ) x X x B(t,T) = x.55 x x.57 x = $0.0066/ That is, the value of the onemonth option to acquire pounds at an exercise price of $.57 when the spot rate is $.55 is.066 /. Given that the PHLX pound call option contract consists of 3,50, the value of the onemonth pound call option is $645.5 (3,50 x ). This figure is exact; the other figures are subject to rounding error.. Suppose the spot price of the yen is $0.009, the threemonth annualized yen interest rate is 3%, the threemonth annualized dollar rate is 6%, and the annualized standard deviation of the dollar:yen exchange rate is 3.5%. What is the value of a threemonth PHLX call option on the Japanese yen at a strike price of $0.0099/? ANSWER. To apply Equation 8. to value this option, we must first estimate B(t,0.5) and B*(t,0.5), since T = 0.5 (three months equal 0.5 years). Given the annualized threemonth interest rates of 6% and 3%, the threemonth U.S. and Japanese interest rates are.5% (6/4) and 0.75% (3/4), respectively. The associated bond prices are B(t,0.5)= = * B (t,0.5)= = Substituting in the values for B and B* along with those for S (0.009), X (0.0099), and σ (0.35) in Equation 7., we can calculate
12 INSTRUCTORS MANUAL: MULTINATIONAL FINANCIAL MANAGEMENT, 7TH ED. * ln( SB /XB)+ 0.5σ T ln(0.009x0.9956/0.0099x0.985)+ 0.5(0.35 ) (0.5) d = = =.5693 σ T d = d σ T = =.5073 Using NORMDIST in Excel yields computed values of N(.5693) = and N(.5073) = Applying Equation 7., we can now calculate the value of the onemonth pound call option: * C(t) = N( d ) x S(t) x B (t,t) N( d ) x X x B(t,T) = x x x x = $ / That is, the value of the threemonth option to acquire yen at an exercise price of $ when the spot rate is $0.009 is /. Given that the PHLX yen call option con tract consists of 6,50,000, the value of the 90 day yen call option is $6,774.3 (6,50,000 x ). This figure is exact; the other figures are subject to rounding error. 3. Suppose that the premium on March 0 on a June 0 yen put option is cents per yen at a strike price of $ The forward rate for June 0 is = $ and the quarterly U.S. interest rate is %. If putcall parity holds, what is the current price of a June 0 PHLX yen call option with an exercise price of $0.0077? ANSWER. We can apply the version of putcall option interest parity as expressed in Equation 6.5 to value this option. According to this formula, f X C = + P + r h Substituting in the numbers given in the question, we have f X C = + rh P= = / Given that the size of the PHLX yen option contract is 6,50,000, the value of this contract is $4,54.7 (6,50,000 x ). This figure is exact; the other figures are subject to rounding error.
CHAPTER 7 SUGGESTED ANSWERS TO CHAPTER 7 QUESTIONS
INSTRUCTOR S MANUAL: MULTINATIONAL FINANCIAL MANAGEMENT, 9 TH ED. CHAPTER 7 SUGGESTED ANSWERS TO CHAPTER 7 QUESTIONS 1. Answer the following questions based on data in Exhibit 7.5. a. How many Swiss francs
More informationAnswers to Concepts in Review
Answers to Concepts in Review 1. Puts and calls are negotiable options issued in bearer form that allow the holder to sell (put) or buy (call) a stipulated amount of a specific security/financial asset,
More informationCHAPTER 22: FUTURES MARKETS
CHAPTER 22: FUTURES MARKETS PROBLEM SETS 1. There is little hedging or speculative demand for cement futures, since cement prices are fairly stable and predictable. The trading activity necessary to support
More information11 Option. Payoffs and Option Strategies. Answers to Questions and Problems
11 Option Payoffs and Option Strategies Answers to Questions and Problems 1. Consider a call option with an exercise price of $80 and a cost of $5. Graph the profits and losses at expiration for various
More informationDerivative Users Traders of derivatives can be categorized as hedgers, speculators, or arbitrageurs.
OPTIONS THEORY Introduction The Financial Manager must be knowledgeable about derivatives in order to manage the price risk inherent in financial transactions. Price risk refers to the possibility of loss
More informationFigure S9.1 Profit from long position in Problem 9.9
Problem 9.9 Suppose that a European call option to buy a share for $100.00 costs $5.00 and is held until maturity. Under what circumstances will the holder of the option make a profit? Under what circumstances
More informationCHAPTER 22: FUTURES MARKETS
CHAPTER 22: FUTURES MARKETS 1. a. The closing price for the spot index was 1329.78. The dollar value of stocks is thus $250 1329.78 = $332,445. The closing futures price for the March contract was 1364.00,
More informationCHAPTER 7 FUTURES AND OPTIONS ON FOREIGN EXCHANGE SUGGESTED ANSWERS AND SOLUTIONS TO ENDOFCHAPTER QUESTIONS AND PROBLEMS
CHAPTER 7 FUTURES AND OPTIONS ON FOREIGN EXCHANGE SUGGESTED ANSWERS AND SOLUTIONS TO ENDOFCHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1. Explain the basic differences between the operation of a currency
More informationAssignment 10 (Chapter 11)
Assignment 10 (Chapter 11) 1. Which of the following tends to cause the U.S. dollar to appreciate in value? a) An increase in U.S. prices above foreign prices b) Rapid economic growth in foreign countries
More information2 Stock Price. Figure S1.1 Profit from long position in Problem 1.13
Problem 1.11. A cattle farmer expects to have 12, pounds of live cattle to sell in three months. The livecattle futures contract on the Chicago Mercantile Exchange is for the delivery of 4, pounds of cattle.
More informationReading: Chapter 19. 7. Swaps
Reading: Chapter 19 Chap. 19. Commodities and Financial Futures 1. The mechanics of investing in futures 2. Leverage 3. Hedging 4. The selection of commodity futures contracts 5. The pricing of futures
More informationChapter 15 OPTIONS ON MONEY MARKET FUTURES
Page 218 The information in this chapter was last updated in 1993. Since the money market evolves very rapidly, recent developments may have superseded some of the content of this chapter. Chapter 15 OPTIONS
More informationCHAPTER 9 SUGGESTED ANSWERS TO CHAPTER 9 QUESTIONS
INSTRUCTOR S MANUAL MULTINATIONAL FINANCIAL MANAGEMENT, 9 TH ED. CHAPTER 9 SUGGESTED ANSWERS TO CHAPTER 9 QUESTIONS 1. What is an interest rate swap? What is the difference between a basis swap and a coupon
More informationIntroduction, Forwards and Futures
Introduction, Forwards and Futures Liuren Wu Zicklin School of Business, Baruch College Fall, 2007 (Hull chapters: 1,2,3,5) Liuren Wu Introduction, Forwards & Futures Option Pricing, Fall, 2007 1 / 35
More informationChapter 16: Financial Risk Management
Chapter 16: Financial Risk Management Introduction Overview of Financial Risk Management in Treasury Interest Rate Risk Foreign Exchange (FX) Risk Commodity Price Risk Managing Financial Risk The Benefits
More informationFor example, someone paid $3.67 per share (or $367 plus fees total) for the right to buy 100 shares of IBM for $180 on or before November 18, 2011
Chapter 7  Put and Call Options written for Economics 104 Financial Economics by Prof Gary R. Evans First edition 1995, this edition September 24, 2011 Gary R. Evans This is an effort to explain puts
More informationGeneral Forex Glossary
General Forex Glossary A ADR American Depository Receipt Arbitrage The simultaneous buying and selling of a security at two different prices in two different markets, with the aim of creating profits without
More informationEndofChapter Question Solutions CHAPTER 6: TRANSACTION EXPOSURE. 61. Tektronix, Inc.: Account Receivable (page 179 in text)
25 CHAPTER 6: TRANSACTION EXPOSURE 61. Tektronix, Inc.: Account Receivable (page 179 in text) a) What are the costs of each alternative of hedging a i2,000,000 account receivable due in six months? Remain
More informationCurrency Derivatives Guide
Currency Derivatives Guide What are Futures? In finance, a futures contract (futures) is a standardised contract between two parties to buy or sell a specified asset of standardised quantity and quality
More informationA guide to managing foreign exchange risk
A guide to managing foreign exchange risk CPA Australia Ltd ( CPA Australia ) is one of the world s largest accounting bodies with more than 122,000 members of the financial, accounting and business profession
More informationThe Market for Foreign Exchange
The Market for Foreign Exchange Chapter Objective: 5 Chapter Five This chapter introduces the institutional framework within which exchange rates are determined. It lays the foundation for much of the
More informationINTRODUCTION TO OPTIONS MARKETS QUESTIONS
INTRODUCTION TO OPTIONS MARKETS QUESTIONS 1. What is the difference between a put option and a call option? 2. What is the difference between an American option and a European option? 3. Why does an option
More informationChapter 20 Understanding Options
Chapter 20 Understanding Options Multiple Choice Questions 1. Firms regularly use the following to reduce risk: (I) Currency options (II) Interestrate options (III) Commodity options D) I, II, and III
More informationForeign Exchange Market: Chapter 7. Chapter Objectives & Lecture Notes FINA 5500
Foreign Exchange Market: Chapter 7 Chapter Objectives & Lecture Notes FINA 5500 Chapter Objectives: FINA 5500 Chapter 7 / FX Markets 1. To be able to interpret direct and indirect quotes in the spot market
More informationBUSM 411: Derivatives and Fixed Income
BUSM 411: Derivatives and Fixed Income 2. Forwards, Options, and Hedging This lecture covers the basic derivatives contracts: forwards (and futures), and call and put options. These basic contracts are
More informationLecture 12. Options Strategies
Lecture 12. Options Strategies Introduction to Options Strategies Options, Futures, Derivatives 10/15/07 back to start 1 Solutions Problem 6:23: Assume that a bank can borrow or lend money at the same
More informationCall and Put. Options. American and European Options. Option Terminology. Payoffs of European Options. Different Types of Options
Call and Put Options A call option gives its holder the right to purchase an asset for a specified price, called the strike price, on or before some specified expiration date. A put option gives its holder
More informationJ. Gaspar: Adapted from Jeff Madura, International Financial Management
Chapter5 Currency Derivatives J. Gaspar: Adapted from Jeff Madura, International Financial Management 5. 1 Currency Derivatives Currency derivatives are financial instruments whose prices are determined
More informationChapter 5. Currency Derivatives. Lecture Outline. Forward Market How MNCs Use Forward Contracts NonDeliverable Forward Contracts
Chapter 5 Currency Derivatives Lecture Outline Forward Market How MNCs Use Forward Contracts NonDeliverable Forward Contracts Currency Futures Market Contract Specifications Trading Futures Comparison
More informationFIN40008 FINANCIAL INSTRUMENTS SPRING 2008
FIN40008 FINANCIAL INSTRUMENTS SPRING 2008 Options These notes consider the way put and call options and the underlying can be combined to create hedges, spreads and combinations. We will consider the
More informationBONUS REPORT#5. The SellWrite Strategy
BONUS REPORT#5 The SellWrite Strategy 1 The SellWrite or Covered Put Strategy Many investors and traders would assume that the covered put or sellwrite strategy is the opposite strategy of the covered
More informationFIN40008 FINANCIAL INSTRUMENTS SPRING 2008. Options
FIN40008 FINANCIAL INSTRUMENTS SPRING 2008 Options These notes describe the payoffs to European and American put and call options the socalled plain vanilla options. We consider the payoffs to these
More informationForward exchange rates
Forward exchange rates The forex market consists of two distinct markets  the spot foreign exchange market (in which currencies are bought and sold for delivery within two working days) and the forward
More informationOnline Share Trading Currency Futures
Online Share Trading Currency Futures Wealth warning: Trading Currency Futures can offer significant returns BUT also subject you to significant losses if the market moves against your position. You may,
More informationCurrency Futures trade on the JSE s Currency Derivatives Trading Platform
Currency Futures trade on the JSE s Currency Derivatives Trading Platform DERIVATIVE MARKET Currency Derivatives Currency Futures www.jse.co.za Johannesburg Stock Exchange Currency Futures & Options trade
More informationOption Theory Basics
Option Basics What is an Option? Option Theory Basics An option is a traded security that is a derivative product. By derivative product we mean that it is a product whose value is based upon, or derived
More informationUnderstanding Stock Options
Understanding Stock Options Introduction...2 Benefits Of ExchangeTraded Options... 4 Options Compared To Common Stocks... 6 What Is An Option... 7 Basic Strategies... 12 Conclusion...20 Glossary...22
More information2. Discuss the implications of the interest rate parity for the exchange rate determination.
CHAPTER 6 INTERNATIONAL PARITY RELATIONSHIPS AND FORECASTING FOREIGN EXCHANGE RATES SUGGESTED ANSWERS AND SOLUTIONS TO ENDOFCHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1. Give a full definition of arbitrage.
More informationOctober 2003 UNDERSTANDING STOCK OPTIONS
October 2003 UNDERSTANDING STOCK OPTIONS Table of Contents Introduction 3 Benefits of ExchangeTraded Options 5 Orderly, Efficient, and Liquid Markets Flexibility Leverage Limited Risk for Buyer Guaranteed
More informationFinance 350: Problem Set 6 Alternative Solutions
Finance 350: Problem Set 6 Alternative Solutions Note: Where appropriate, the final answer for each problem is given in bold italics for those not interested in the discussion of the solution. I. Formulas
More informationOnline Share Trading Currency Futures
Online Share Trading Currency Futures pic Currency Futures Introduction Currency futures contracts can be hardworking additions to any investor s or trader s portfolio. They provide a way to hedge the
More informationOPTIONS MARKETS AND VALUATIONS (CHAPTERS 16 & 17)
OPTIONS MARKETS AND VALUATIONS (CHAPTERS 16 & 17) WHAT ARE OPTIONS? Derivative securities whose values are derived from the values of the underlying securities. Stock options quotations from WSJ. A call
More informationICE Futures U.S., Inc.
ICE Futures U.S., Inc. ICE FUTURES EURO INDEX* Effective with the close of business May 20, 2011 all Euro Index Futures and Option Contracts will no longer be listed for trading. TABLE OF CONTENTS Rule
More information6. Foreign Currency Options
6. Foreign Currency Options So far, we have studied contracts whose payoffs are contingent on the spot rate (foreign currency forward and foreign currency futures). he payoffs from these instruments are
More informationCHAPTER 8 MANAGEMENT OF TRANSACTION EXPOSURE SUGGESTED ANSWERS AND SOLUTIONS TO ENDOFCHAPTER QUESTIONS AND PROBLEMS
CHAPTER 8 MANAGEMENT OF TRANSACTION EXPOSURE SUGGESTED ANSWERS AND SOLUTIONS TO ENDOFCHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1. How would you define transaction exposure? How is it different from economic
More informationCommodity Options as Price Insurance for Cattlemen
Managing for Today s Cattle Market and Beyond Commodity Options as Price Insurance for Cattlemen By John C. McKissick, The University of Georgia Most cattlemen are familiar with insurance, insuring their
More informationCHAPTER 20. Financial Options. Chapter Synopsis
CHAPTER 20 Financial Options Chapter Synopsis 20.1 Option Basics A financial option gives its owner the right, but not the obligation, to buy or sell a financial asset at a fixed price on or until a specified
More informationFAS 133 Reporting and Foreign Currency Transactions
FAS 133 Reporting and Foreign Currency Transactions Participating Forwards An opinion on the Appropriate Accounting & Authority with Relevant Accounting Citations RISK LIMITED CORPORATION 2007 Risk Limited
More informationCME Options on Futures
CME Education Series CME Options on Futures The Basics Table of Contents SECTION PAGE 1 VOCABULARY 2 2 PRICING FUNDAMENTALS 4 3 ARITHMETIC 6 4 IMPORTANT CONCEPTS 8 5 BASIC STRATEGIES 9 6 REVIEW QUESTIONS
More informationForeign Exchange Market INTERNATIONAL FINANCE. Function and Structure of FX Market. Market Characteristics. Market Attributes. Trading in Markets
Foreign Exchange Market INTERNATIONAL FINANCE Chapter 5 Encompasses: Conversion of purchasing power across currencies Bank deposits of foreign currency Credit denominated in foreign currency Foreign trade
More informationOptions Pricing. This is sometimes referred to as the intrinsic value of the option.
Options Pricing We will use the example of a call option in discussing the pricing issue. Later, we will turn our attention to the PutCall Parity Relationship. I. Preliminary Material Recall the payoff
More informationFinance 436 Futures and Options Review Notes for Final Exam. Chapter 9
Finance 436 Futures and Options Review Notes for Final Exam Chapter 9 1. Options: call options vs. put options, American options vs. European options 2. Characteristics: option premium, option type, underlying
More informationCHAPTER 20: OPTIONS MARKETS: INTRODUCTION
CHAPTER 20: OPTIONS MARKETS: INTRODUCTION PROBLEM SETS 1. Options provide numerous opportunities to modify the risk profile of a portfolio. The simplest example of an option strategy that increases risk
More informationUnderstanding Options Trading. ASX. The Australian Sharemarket
Understanding Options Trading ASX. The Australian Sharemarket Disclaimer of Liability Information provided is for educational purposes and does not constitute financial product advice. You should obtain
More informationLearning Curve Interest Rate Futures Contracts Moorad Choudhry
Learning Curve Interest Rate Futures Contracts Moorad Choudhry YieldCurve.com 2004 Page 1 The market in shortterm interest rate derivatives is a large and liquid one, and the instruments involved are
More informationCHAPTER 10 MANAGING ACCOUNTING EXPOSURE
120 CHAPTER 10 MANAGING ACCOUNTING EXPOSURE KEY POINTS 1. Hedging cannot provide protection against expected exchange rate changes. Firms ordinarily cope with anticipated currency changes by engaging in
More informationCHAPTER 12 CHAPTER 12 FOREIGN EXCHANGE
CHAPTER 12 CHAPTER 12 FOREIGN EXCHANGE CHAPTER OVERVIEW This chapter discusses the nature and operation of the foreign exchange market. The chapter begins by describing the foreign exchange market and
More informationThere are two types of options  calls and puts.
Options on Single Stock Futures Overview Options on single Stock Futures An SSF option is, very simply, an instrument that conveys to its holder the right, but not the obligation, to buy or sell an SSF
More informationChapter 1 Currency Exchange Rates
Chapter 1 Currency Exchange Rates 1. Since the value of the British pound in U.S. dollars has gone down, it has depreciated with respect to the U.S. dollar. Therefore, the British will have to spend more
More informationLearning Curve Forward Rate Agreements Anuk Teasdale
Learning Curve Forward Rate Agreements Anuk Teasdale YieldCurve.com 2004 Page 1 In this article we review the forward rate agreement. Money market derivatives are priced on the basis of the forward rate,
More informationAdvanced forms of currency swaps
Advanced forms of currency swaps Basis swaps Basis swaps involve swapping one floating index rate for another. Banks may need to use basis swaps to arrange a currency swap for the customers. Example A
More information1. HOW DOES FOREIGN EXCHANGE TRADING WORK?
XV. Important additional information on forex transactions / risks associated with foreign exchange transactions (also in the context of forward exchange transactions) The following information is given
More informationIntroduction to Options. Derivatives
Introduction to Options Econ 422: Investment, Capital & Finance University of Washington Summer 2010 August 18, 2010 Derivatives A derivative is a security whose payoff or value depends on (is derived
More informationFX Options NASDAQ OMX
FX Options OPTIONS DISCLOSURE For the sake of simplicity, the examples that follow do not take into consideration commissions and other transaction fees, tax considerations, or margin requirements, which
More informationUnderstanding Options Trading. ASX. The Australian Sharemarket
Understanding Options Trading ASX. The Australian Sharemarket Disclaimer of Liability Information provided is for educational purposes and does not constitute financial product advice. You should obtain
More informationFactors Affecting Option Prices
Factors Affecting Option Prices 1. The current stock price S 0. 2. The option strike price K. 3. The time to expiration T. 4. The volatility of the stock price σ. 5. The riskfree interest rate r. 6. The
More informationThis act of setting a price today for a transaction in the future, hedging. hedge currency exposure, short long long hedge short hedge Hedgers
Section 7.3 and Section 4.5 Oct. 7, 2002 William Pugh 7.3 Example of a forward contract: In May, a crude oil producer gets together with a refiner to agree on a price for crude oil. This price is for crude
More informationIndex options. Module 9
Course #: Title Module 9 Index options Index options... 1 Topic 1: Why trade index options?... 3 Trade the direction of the index... 3 Leveraged exposure... 3 Protect a share portfolio... 4 Topic 2: How
More informationOnline Appendix: Payoff Diagrams for Futures and Options
Online Appendix: Diagrams for Futures and Options As we have seen, derivatives provide a set of future payoffs based on the price of the underlying asset. We discussed how derivatives can be mixed and
More informationCHAPTER 11 INTRODUCTION TO SECURITY VALUATION TRUE/FALSE QUESTIONS
1 CHAPTER 11 INTRODUCTION TO SECURITY VALUATION TRUE/FALSE QUESTIONS (f) 1 The three step valuation process consists of 1) analysis of alternative economies and markets, 2) analysis of alternative industries
More informationSolutions: Sample Exam 2: FINA 5500
Short Questions / Problems Section: (88 points) Solutions: Sample Exam 2: INA 5500 Q1. (8 points) The following are direct quotes from the spot and forward markets for pounds, yens and francs, for two
More information9 Basics of options, including trading strategies
ECG590I Asset Pricing. Lecture 9: Basics of options, including trading strategies 1 9 Basics of options, including trading strategies Option: The option of buying (call) or selling (put) an asset. European
More informationInterest Rate Options
Interest Rate Options A discussion of how investors can help control interest rate exposure and make the most of the interest rate market. The Chicago Board Options Exchange (CBOE) is the world s largest
More informationBuying Call or Long Call. Unlimited Profit Potential
Options Basis 1 An Investor can use options to achieve a number of different things depending on the strategy the investor employs. Novice option traders will be allowed to buy calls and puts, to anticipate
More informationKEY INFORMATION DOCUMENT
KEY INFORMATION DOCUMENT PSG WEALTH CURRENCY FUTURES TRADING ACCOUNT TRADING ACCOUNT PAGE 0 This document is a summary of key information about the PSG Wealth currency futures trading account. It will
More informationFX, Derivatives and DCM workshop I. Introduction to Options
Introduction to Options What is a Currency Option Contract? A financial agreement giving the buyer the right (but not the obligation) to buy/sell a specified amount of currency at a specified rate on a
More informationUNDERSTANDING EQUITY OPTIONS
UNDERSTANDING EQUITY OPTIONS The Options Industry Council (OIC) is a nonprofit association created to educate the investing public and brokers about the benefits and risks of exchangetraded options.
More informationChapter 14 Foreign Exchange Markets and Exchange Rates
Chapter 14 Foreign Exchange Markets and Exchange Rates International transactions have one common element that distinguishes them from domestic transactions: one of the participants must deal in a foreign
More informationChapter 21: Options and Corporate Finance
Chapter 21: Options and Corporate Finance 21.1 a. An option is a contract which gives its owner the right to buy or sell an underlying asset at a fixed price on or before a given date. b. Exercise is the
More informationProduct Disclosure Statement
Product Disclosure Statement Australia  June 2015 Associated Foreign Exchange Australia Pty Ltd. ABN: 85 119 392 586 ACN: 119 392 586 AFSL Number: 305246 Global Payment and Risk Management Solutions Table
More informationEurodollar Futures, and Forwards
5 Eurodollar Futures, and Forwards In this chapter we will learn about Eurodollar Deposits Eurodollar Futures Contracts, Hedging strategies using ED Futures, Forward Rate Agreements, Pricing FRAs. Hedging
More informationChapter 3.4. Forex Options
Chapter 3.4 Forex Options 0 Contents FOREX OPTIONS Forex options are the next frontier in forex trading. Forex options give you just what their name suggests: options in your forex trading. If you have
More informationThe relationship between exchange rates, interest rates. In this lecture we will learn how exchange rates accommodate equilibrium in
The relationship between exchange rates, interest rates In this lecture we will learn how exchange rates accommodate equilibrium in financial markets. For this purpose we examine the relationship between
More informationOPTION TRADING STRATEGIES IN INDIAN STOCK MARKET
OPTION TRADING STRATEGIES IN INDIAN STOCK MARKET Dr. Rashmi Rathi Assistant Professor Onkarmal Somani College of Commerce, Jodhpur ABSTRACT Options are important derivative securities trading all over
More informationBasic Strategies for Managing U.S. Dollar/Brazilian Real Exchange Rate Risk for DollarDenominated Investors. By Ira G. Kawaller Updated May 2003
Basic Strategies for Managing U.S. Dollar/Brazilian Real Exchange Rate Risk for DollarDenominated Investors By Ira G. Kawaller Updated May 2003 Brazilian Real futures and options on futures at Chicago
More informationFina4500 Spring 2015 Extra Practice Problems Instructions
Extra Practice Problems Instructions: The problems are similar to the ones on your previous problem sets. All interest rates and rates of inflation given in the problems are annualized (i.e., stated as
More informationUse the option quote information shown below to answer the following questions. The underlying stock is currently selling for $83.
Problems on the Basics of Options used in Finance 2. Understanding Option Quotes Use the option quote information shown below to answer the following questions. The underlying stock is currently selling
More informationForwards and Futures
Prof. Alex Shapiro Lecture Notes 16 Forwards and Futures I. Readings and Suggested Practice Problems II. Forward Contracts III. Futures Contracts IV. ForwardSpot Parity V. Stock Index ForwardSpot Parity
More informationINTRODUCTION TO COTTON FUTURES Blake K. Bennett Extension Economist/Management Texas Cooperative Extension, The Texas A&M University System
INTRODUCTION TO COTTON FUTURES Blake K. Bennett Extension Economist/Management Texas Cooperative Extension, The Texas A&M University System Introduction For well over a century, industry representatives
More informationIntroduction to Options
Introduction to Options By: Peter Findley and Sreesha Vaman Investment Analysis Group What Is An Option? One contract is the right to buy or sell 100 shares The price of the option depends on the price
More informationLEAPS LONGTERM EQUITY ANTICIPATION SECURITIES
LEAPS LONGTERM EQUITY ANTICIPATION SECURITIES The Options Industry Council (OIC) is a nonprofit association created to educate the investing public and brokers about the benefits and risks of exchangetraded
More informationCurrency Options. www.mx.ca
Currency Options www.mx.ca Table of Contents Introduction...3 How currencies are quoted in the spot market...4 How currency options work...6 Underlying currency...6 Trading unit...6 Option premiums...6
More informationCHAPTER 8: TRADING STRATEGES INVOLVING OPTIONS
CHAPTER 8: TRADING STRATEGES INVOLVING OPTIONS Unless otherwise stated the options we consider are all European. Toward the end of this chapter, we will argue that if European options were available with
More information2. How is a fund manager motivated to behave with this type of renumeration package?
MØA 155 PROBLEM SET: Options Exercise 1. Arbitrage [2] In the discussions of some of the models in this course, we relied on the following type of argument: If two investment strategies have the same payoff
More informationArbitrage. In London: USD/GBP 0.645 In New York: USD/GBP 0.625.
Arbitrage 1. Exchange rate arbitrage Exchange rate arbitrage is the practice of taking advantage of inconsistent exchange rates in different markets by selling in one market and simultaneously buying in
More informationManaging Currency Risks with Options
fx products Managing Currency Risks with Options John W. Labuszewski managing director Research and product development jlab@cmegroup.com cmegroup.com/fx This represents an overview of our currency options
More informationChapter 5 Option Strategies
Chapter 5 Option Strategies Chapter 4 was concerned with the basic terminology and properties of options. This chapter discusses categorizing and analyzing investment positions constructed by meshing puts
More informationCHAPTER 5 THE MARKET FOR FOREIGN EXCHANGE SUGGESTED ANSWERS AND SOLUTIONS TO ENDOFCHAPTER QUESTIONS AND PROBLEMS
CHAPTER 5 THE MARKET FOR FOREIGN EXCHANGE SUGGESTED ANSWERS AND SOLUTIONS TO ENDOFCHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1. Give a full definition of the market for foreign exchange. Answer: Broadly
More informationCommodity Futures and Options
Understanding Commodity Futures and Options for Producers of Livestock and Livestock Products CIS 1100 The Authors Larry D. Makus, C. Wilson Gray and Neil R. Rimbey* Introduction Risk associated with an
More information