Solution
Options versus Futures. Explain the difference between foreign currency options and futures and when either might be used most appropriately.
Future Terminology. Explain the meaning and probable significance for international business of the following contract specifications:
Specific – sized contract
Standard method of stating exchange rates
Standard maturity date
Collateral and maintenance margins
Counterparty
Puts and Calls. What is the basic difference between a put on British pounds sterling and a call on sterling?
Buying a European Option. You have the same information as in Question 6, except that the pricing is for a European option. What is different?
Paulo’s Puts. Paulo writes a put option on Japanese yen with a strike of $0.008000/¥ (¥125.00/$) at a premium of 0.0080 cents per yen and with an expiration date six month from now. The option is for ¥12,500,000. What is Paulo’s profit or loss at maturity if the ending spot rates are ¥110/$, ¥115/$, ¥120/$, ¥125/$, ¥130/$, ¥135/$, and ¥140/$.
Black River Investments. Jennifer Magnussen, a currency trader for Chicago-based Black River Investments, uses the future quotes (shown at the bottom of the page) on the British pound to speculate on its value:
If Jennifer buys 5 June pound futures, and the spot rate at maturity is $1.3980/pound, what is the value of her position?
If Jennifer sells 12 March pound futures, and the spot rate at maturity is $1.4560/pound, what is the value of her position?
If Jennifer buys 3 March pound futures, and the spot rate at maturity is $1.4560/pound, what is the value of her position?
If Jennifer sells 12 June pound futures, and the spot rate at maturity is $1.3980/pound, what is the value of her position?
Madera Capital. Katya Berezovsky is a currency speculator for Madera Capital of Los Angeles. Her latest speculative position is to profit from her expectation that the U.S. dollar will rise significantly against the Japanese yen. The current spot rate is ¥120.00/$. She must choose between the following 90 – day options on the Japanese yen.
Should Katya buy a put on yen or a call on yen?
Using your answer to part a, what is Katya’s break – even price?
Using your answer to part a, what is Katya’s gross profit and net profit (including the premium) if the spot rate at the end of the 90 days is ¥140/$?
Call Profits. Assume that a call option on euros is written with a strike price of $1.25/€ at a premium of 3.80 cents per euro ($0.0380/€) and with an expiration date three months from now. The option is for €100,000. Calculate your profit or loss should you exercise before maturity at a time when the euro is traded spot at
$1.10/€
$1.15/€
$1.20/€
$1.25/€
$1.30/€
$1.35/€
$1.40/€
Giri the Contrarian. Giri Patel works for CIBC Currency Funds in Toronto. Giri is something of a contrarian – as opposed to most of the forecasts, he believes the Canadian dollar (C$) will appreciate versus the U.S. dollar over the coming 90 days. The current spot rate is $0.6750/C$. Giri may choose between the following options on the Canadian dollar:
Should Giri buy a put on Canadian dollars or a call on Canadian dollars?
Using your answer to part a, what is Giri’s break-even price?
Using your answer to part a, what is Giri’s gross profit and net profit (including the premium) if the spot rate at the end of the 90 days is indeed $0.7600/C$?
Using your answer to part a, what is Giri’s gross profit and net profit (including the premium) if the spot rate at the end of the 90 days is indeed $0.8250/C$?
Options versus Futures. Explain the difference between foreign currency options and futures and when either might be used most appropriately.
Future Terminology. Explain the meaning and probable significance for international business of the following contract specifications:
Specific – sized contract
Standard method of stating exchange rates
Standard maturity date
Collateral and maintenance margins
Counterparty
Puts and Calls. What is the basic difference between a put on British pounds sterling and a call on sterling?
Buying a European Option. You have the same information as in Question 6, except that the pricing is for a European option. What is different?
Paulo’s Puts. Paulo writes a put option on Japanese yen with a strike of $0.008000/¥ (¥125.00/$) at a premium of 0.0080 cents per yen and with an expiration date six month from now. The option is for ¥12,500,000. What is Paulo’s profit or loss at maturity if the ending spot rates are ¥110/$, ¥115/$, ¥120/$, ¥125/$, ¥130/$, ¥135/$, and ¥140/$.
Black River Investments. Jennifer Magnussen, a currency trader for Chicago-based Black River Investments, uses the future quotes (shown at the bottom of the page) on the British pound to speculate on its value:
If Jennifer buys 5 June pound futures, and the spot rate at maturity is $1.3980/pound, what is the value of her position?
If Jennifer sells 12 March pound futures, and the spot rate at maturity is $1.4560/pound, what is the value of her position?
If Jennifer buys 3 March pound futures, and the spot rate at maturity is $1.4560/pound, what is the value of her position?
If Jennifer sells 12 June pound futures, and the spot rate at maturity is $1.3980/pound, what is the value of her position?
Madera Capital. Katya Berezovsky is a currency speculator for Madera Capital of Los Angeles. Her latest speculative position is to profit from her expectation that the U.S. dollar will rise significantly against the Japanese yen. The current spot rate is ¥120.00/$. She must choose between the following 90 – day options on the Japanese yen.
Should Katya buy a put on yen or a call on yen?
Using your answer to part a, what is Katya’s break – even price?
Using your answer to part a, what is Katya’s gross profit and net profit (including the premium) if the spot rate at the end of the 90 days is ¥140/$?
Call Profits. Assume that a call option on euros is written with a strike price of $1.25/€ at a premium of 3.80 cents per euro ($0.0380/€) and with an expiration date three months from now. The option is for €100,000. Calculate your profit or loss should you exercise before maturity at a time when the euro is traded spot at
$1.10/€
$1.15/€
$1.20/€
$1.25/€
$1.30/€
$1.35/€
$1.40/€
Giri the Contrarian. Giri Patel works for CIBC Currency Funds in Toronto. Giri is something of a contrarian – as opposed to most of the forecasts, he believes the Canadian dollar (C$) will appreciate versus the U.S. dollar over the coming 90 days. The current spot rate is $0.6750/C$. Giri may choose between the following options on the Canadian dollar:
Should Giri buy a put on Canadian dollars or a call on Canadian dollars?
Using your answer to part a, what is Giri’s break-even price?
Using your answer to part a, what is Giri’s gross profit and net profit (including the premium) if the spot rate at the end of the 90 days is indeed $0.7600/C$?
Using your answer to part a, what is Giri’s gross profit and net profit (including the premium) if the spot rate at the end of the 90 days is indeed $0.8250/C$?
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