# Fin431 Final Extra Credit Solutions Essay

1871 WordsJan 3, 20158 Pages

This entire homework is worth 2 exam points. Attach/show your work for full credit.
You are a trader in Brazil at the Bolsa exchange writing both Calls and Puts. Call and Put options are available on the US dollar with a strike of 2.2R/$ for a premia of .40R and .20R respectively. Assume each contract controls $100,000. Be sure to draw the payoff and profit/loss diagrams before answering the questions.
1. Which breakeven point is correct?
a. Call 2.0
b. Put 2.4
c. Call 2.4
d. Put 1.8
e. Put 2.0
2. If at maturity, the spot is 1.9R/$ at maturity, which option is exercised?
a. Put, profit 10,000R
b. Call, payoff -30,000R
c. Call, payoff -10,000R
d. Put, payoff -30,000R
e. None of the above
3. Suppose that the spot is 2.3R/$ at*…show more content…* You are a US firm and owe one Million Real per year, due at year end, for the next two years. Your bank offers you a forward price of 2.42R/$ and 2.67R/$; alternatively you can swap with a Brazilian firm at a rate of 2.55R/$. Assume that you can borrow funds for 15% in Brazil, and 5% in the US. Also, the treasury rates in Brazil and the US are 12% and 3%.
9. To hedge the Real obligations, you should ________.
a. Agree to buy Real forward
b. Agree to buy Dollars forward
c. Agree to swap paying Real and receiving Dollars
d. Agree to swap paying Dollars and receiving Real
e. Agree to sell the Real forward
10. What is the PV of the cash-flows for the lowest cost alternative?
a. Greater than $730,000
b. $728,000-$730,000
c. $726,000-$727,999
d. $720,000-$725,999
e. Less than $720,000
11. What is the premium/discount in dollars using the existing forwards that you are paying in comparison to forwards determined by CIPC?
a. More than $20,000 premium
b. $15,000-$20,000 premium
c. $15,000 premium to a $15,000 discount
d. $15,000-$20,000 discount
e. less than a $20,000 discount
Solutions:
Whether you use forwards or a swap, you are effectively doing this:
Deciding on the forwards vs. swap will determine the $’s you will pay.
Forwards: Swap: Using swap yields a lower dollar PV for the obligation, thus, is the superior hedge. Note that you discount that cash-flows at the rate YOU can borrow funds. Since after swapping,