Political Risk and Currency Derivative Values Assume that interest rate parity exists. At 10: 30 a.m. the media reported that the Mexican government’s political problems had been solved, which reduced the expected volatility of the Mexican peso against the dollar over the next month. However, this news had no effect on the prevailing one-month interest rates of the U.S. dollar or Mexican peso, or on the expected exchange rate of the Mexican peso in one month. The spot rate of the Mexican peso was $0.13 as of 10 a.m. and remained at that level all morning. At 10 a.m., Piazza Co. purchased a call option at the money on 1 million Mexican pesos with a December expiration date. At 11: 00 a.m., Corradetti Co. purchased a call option at the money on 1 million pesos with a December expiration date. Did Corradetti Co. pay more than, less than, or the same as Piazza Co. for the options? Briefly explain. Teke Co. purchased futures contracts on 1 million Mexican pesos with a December settlement date at 10 a.m. Malone Co. purchased futures contracts on 1 million Mexican pesos with a December settlement date at 11 a.m. Did Teke Co. pay more than, less than, or the same as Malone Co. for the futures contracts? Briefly explain.

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 16, Problem 26QA
Textbook Problem

Political Risk and Currency Derivative Values Assume that interest rate parity exists. At 10: 30 a.m. the media reported that the Mexican government’s political problems had been solved, which reduced the expected volatility of the Mexican peso against the dollar over the next month. However, this news had no effect on the prevailing one-month interest rates of the U.S. dollar or Mexican peso, or on the expected exchange rate of the Mexican peso in one month. The spot rate of the Mexican peso was $0.13 as of 10 a.m. and remained at that level all morning.

  1. At 10 a.m., Piazza Co. purchased a call option at the money on 1 million Mexican pesos with a December expiration date. At 11: 00 a.m., Corradetti Co. purchased a call option at the money on 1 million pesos with a December expiration date. Did Corradetti Co. pay more than, less than, or the same as Piazza Co. for the options? Briefly explain.
  2. Teke Co. purchased futures contracts on 1 million Mexican pesos with a December settlement date at 10 a.m. Malone Co. purchased futures contracts on 1 million Mexican pesos with a December settlement date at 11 a.m. Did Teke Co. pay more than, less than, or the same as Malone Co. for the futures contracts? Briefly explain.

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