International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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Suppose that the spot EUR in dollar exchange rate is EUR/USD = 1.0510-15. A trader bought a futures contract with a contract size of EUR 125,000, an initial margin of USD 2,600 and a maintenance margin of USD 2,400 at USD 1.0525 three days ago and had no gains or losses on the purchase day. The amount within the margin account will be cleared if no positions are taken. The settlement prices were USD 1.0512 and USD 1.0508 for the previous two trading days, respectively. The settlement price today is USD 1.0520. What is the amount within the margin account if this trader decides not to put any money aside for this margin account after purchase?
Consider the following futures contract for the currency of Brazil, Brazilian real (BRL).
Contract volume: 100,000 Brazilian reals
Initial margin: $1000
Maintenance margin: $800
Day
Settle price ($/BRL)
1
0.19
2
0.189
3
0.186
4
0.187
(a) What’s an example of a hedger who might use this contract?
(b) Assuming the USD has neither appreciated nor depreciated, has the Brazilian real appreciated or depreciated between days 1 and 4?
Are there any limitations in the use of currency futures contracts when locking in a specific exchange rate at which company can sell all the pounds it expects to receive in each of the upcoming months?
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- An investor enters a short forward contract to sell 100 euros for dollars at exchange rate 1.3 dollars per euro. If the exchange rate at the end of contract is 1.29 dollars per euro, the dollar payoff is (a) −130 (b) − 1 (c) 0 (d) 1 (e) 130 And, The standard deviation of quarterly changes in oil price is 0.65, the standard deviation of quarterly changes in oil futures price is 0.81, and the correlation between the two changes is 0.8. The optimal hedge ratio for a 3-month futures contract is (a) 0.13 (b) 0.64 (c) 0.8 (d) 0.99 (e) 1.25arrow_forwardShandra Corporation (a U.S.-based company) expects to order goods from a foreign supplier at a price of 121,000 pounds, with delivery and payment to be made on April 20. On February 20, when the spot rate is $1.41 per pound, Shandra purchases a two-month call option on 121,000 pounds and designates this option as a cash flow hedge of a forecasted foreign currency transaction. The time value of the option is excluded in assessing hedge effectiveness; the change in time value is recognized in net income over the life of the option. The option has a strike price of $1.41 per pound and costs $1,210. The goods are received and paid for on April 20. Shandra sells the imported goods in the local market by May 31. The spot rate for pounds is $1.46 on April 20. What amount will Shandra Corporation report as foreign exchange gain or loss in net income for the quarter ended June 30?arrow_forwardSuppose, on a certain day in February, a speculator observes the following prices in the foreign exchange and currency futures markets: GBP/USD spot: 1.6465 March futures: 1.6425 September futures: 1.6250 December futures: 1.6130 The speculator thinks that the markets are overestimating the weakness of sterling (GBP) against the dollar. How can she act on this view to make a profit? Under what circumstances do her actions lead to a loss?arrow_forward
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