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International Financial Management

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter5: Currency Derivatives

Section: Chapter Questions

Problem 33QA

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J1

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o. What is the maximum possible gain the purchaser of a strangle can achieve using these options? Round your answer to three decimal places.
The maximum gain of a long strangle is unlimited for currency
appreciation
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0
eBook
The following information is currently available for Canadian dollar (C$) options:
. Put option exercise price $0.68.
Put option premium $0.016 per unit.
• Call option exercise price $0.70.
Call option premium $0.012 per unit.
. One option contract represents C$50,000.
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The maximum gain is limited only for currency depreciation
and equal to $
b. What is the maximum possible loss the writer of a strangle can incur? Enter your answer as a positive value. Round your answer to three decimal places.
The maximum loss of a short strangle is unlimited for currency
appreciation
and equal to $
The maximum loss is limited only for currency depreciation
c. Locate the break-even points of the strangle. Round your answers to three decimal places.
Lower break-even point: $
Higher break-even point: $
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Use the following information for the next 8 questions. UCD (U.S. based MNC) will receive 250,000 euros in one year. The spot exchange rate today is $1.20 per euro. It observes that1. The one-year interest rate for euros is 8%, and the one-year interest rate for U.S. dollars is 3%.2. In the option market, there is one-year call option or put option available. Both options have the same exercise price of $1.18 per euro, and a premium of $0.02 per euro.3. In the forward market, the one-year forward rate exhibits a 5% discount from the current spot exchange rate. 4 If UCD decides to use options contracts to hedge its receivables, UCD shall
Use the following information for the next 8 questions. UCD (U.S. based MNC) will receive 250,000 euros in one year. The spot exchange rate today is $1.20 per euro. It observes that1. The one-year interest rate for euros is 8%, and the one-year interest rate for U.S. dollars is 3%.2. In the option market, there is one-year call option or put option available. Both options have the same exercise price of $1.18 per euro, and a premium of $0.02 per euro.3. In the forward market, the one-year forward rate exhibits a 5% discount from the current spot exchange rate. 3 How many U.S. dollars will UCD end up receiving for its 250,000 euro receivable by using money market hedge?
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Q1 Consider the option on currency HKD against the USD: • Current spot rate is HKD7.50 for 1 USD • Risk-free HKD rate of interest is 5% p.a. • Risk-free USD rate of interest is 2% p.a. • Volatility (σ) of the currency returns is 20% p.a. • Maturity of the option is 3 months. • Strike rate of the option is HKD8.00 for 1 USD • The currency options are European in nature Answer the following questions. (i) How much does it cost to hold (i.e., buy) a call-HKD option? Use the Garman Kohlhagen model.
Q1 Consider the option on currency HKD against the USD: • Current spot rate is HKD7.50 for 1 USD • Risk-free HKD rate of interest is 5% p.a. • Risk-free USD rate of interest is 2% p.a. • Volatility (σ) of the currency returns is 20% p.a. • Maturity of the option is 3 months. • Strike rate of the option is HKD8.00 for 1 USD • The currency options are European in nature Answer the following questions. (i) How much does it cost to hold (i.e., buy) a call-HKD option? Use the Garman Kohlhagen model. (ii) What is the minimum terminal exchange rate for the holder of the call-HKD option to profit from holding the currency option? (iii) How much does it cost to hold (i.e., buy) a put-HKD option? Do not use the Garman Kohlhagen model.
Find the value of a put option on £10,000 with a strike price of €1.5000/£ which matures in one period. The current exchange rate is €1.5000/£ and in the next period the exchange rate can increase to €2.4000/£ or decrease to €0.9375/£. The current one-period interest rates are i€ = 3% and are i£ = 4%. Group of answer choices None of the other answers€3,382 €2,027 €2,047 no explanation needed €3,415
Question 1 Consider the option on currency HKD against the USD: Current spot rate is HKD7.50 for 1 USD:· Risk-free HKD rate of interest is 5% p.a.· Risk-free USD rate of interest is 2% p.a.· Volatility (σ) of the currency returns is 20% p.a.· Maturity of the option is 3 months.· Strike rate of the option is HKD8.00 for 1 USD· The currency options are European in nature (a) Draw the terminal payoff diagram for the holder of the currency call option on HKD. (b) Draw the terminal payoff diagram for the holder of the currency put option on USD. (c) How much does it cost to hold (i.e., buy) a call-HKD option? Use the Garman Kohlhagen model. (d) What is the minimum terminal exchange rate for the holder of the call-HKD option to profit fromholding the currency option?…

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