International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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One year ago, you purchased a put option on 100,000 euros with an expiration date of 1 year. Youreceived a premium on the put option of $.04 per unit. The exercise price was $1.22. Assume that 1 yearago, the spot rate of the euro was $1.20, the 1-year forward rate exhibited a discount of 2 percent, and the1-year futures price was the same as the 1-year forward rate. From 1 year ago to today, the eurodepreciated against the dollar by 4 percent. Today the put option will be exercised (if it is feasible for thebuyer to do so).a. Determine the total dollar amount of your profit or loss from your position in the put option. Explainthrough contingency graph.b. Now assume that instead of taking a position in the put option 1 year ago, you sold a futures contract on 100,000 euros with a settlement date of 1 year. Determine the total dollar amount of your profit or loss.Show in a graph.
One year ago, you sold a put option on 100,000 Australian dollars with an expiration date of one year. You received a premium on the put option of AU$.04 per unit. The exercise price was AU$0.78. Assume that one year ago, the spot rate of the Australian dollar was $0.76, the one-year forward rate exhibited a discount of 2 per cent, and the one-year futures price was the same as the one-year forward rate. From one year ago to today, the Australian dollar depreciated against the US dollar by 4 per cent. Today, the put option will be exercised (if it is feasible for the buyer to do so).
Determine the total dollar amount of your profit or loss from your position in the put option.
Now assume that instead of taking a position in the put option one year ago, you sold a futures contract on 100,000 Australian dollars with a settlement date of one year. Determine the total dollar amount of your profit or loss.
Suppose that the return on a U.K. treasury bill is eight percent annum and the return on a U.S. treasury bill is eight percent annum and that you had $1,000,000 earmarked for short term investment for a period of a month. In which of the securities would you place your money? (Assume you are not a speculator). Show your calculations.
1 British pound (spot) $1.7748
1 British pound (30-day futures) $1.7776
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- A stock price is currently $ 100. Over the next two six-month periods it is expected to go up by 10% or go down by 10%. The risk-free interest rate is 8% per annum with continuous compounding. (i) What is the value of a one-year European call option with a strike price of $ 100. (ii) What is the value of a one-year European put option with a strike price of $ 100. (iii) Verify that the European call and the European put satisfy put-call parity.arrow_forwardYou took a long position on EUR when the prevailing market rate was EUR/USD: 1.3223-1.3227. After six months, you want to square your net FX position to take profits. Which of the following scenarios will yield you maximum profits? Scenario A: at EUR/USD 1.3245 – 1.3253 Scenario B: at EUR/USD 1.3230 – 1.3255 Scenario C: at EUR/USD 1.3231 – 1.3235 Scenario D: at EUR/USD 1.3247 – 1.3252 You took a short position on GBP when the prevailing market rate was GBP/USD: 1.3223-1.3227. After six months, you want to square your net FX position when the prevailing market rate is GBP/USD 1.3218-1.3221. How may pips did you earn? 5 pips 9 pips 2 pips .0009 pips If you want to square your long GBP position, at what rate are you going to sell GBP to maximize profits given GBP/USD quotes from three counterparties? BDO: 1.35-45 BPI: 1.40-55 SECB: 1.50-1.65 1.35 1.50 1.65 1.45 Given “RTB 5-12”, which of the following statements is correct? This is a 5-yr RTB issued in 2012 This…arrow_forwardYou purchase a futures contract in euros for $170,000. The trading unit is 125,000 euros. What is the ratio of cents to euros in this contract? (Divide the dollar con- tract size by the size of the trading unit.) Assume you are required to put up $4,000 in margin and the euro increases by 3¢ (per euro). What will be your return as a percentage of margin?arrow_forward
- Suppose you (U.S. investor) purchase a 5-year, AA-rated Euro bond for par that is paying an annual coupon at the rate equal to 8 percent. The bond has a face value of 1,000 Euros. The spot exchange rate at the time of purchase is USD1.15/EUR. At the end of the year 1, the bond is upgraded to AAA-rated and the yield changes to 7.5% per annum continuous compounding. In addition due to changes in macroeconomic environment, the exchange rate also changed to USD1.25/EUR. Assume that a U.S. investor holds this bond for one year and sells it in the market at the end of year 1. EUR is the abbreviation for Euro and USD is the abbreviation for U.S. dollar. What is the overall gain / loss in U.S. dollars for the U.S. investor at the end of year 1 (t = 1 year)? (Roundoff your answer to four decimal places, in order to get as accurate answer as possible on Canvas. If your answer is -$1.2345, loss of $1.2345, then type your answer as -1.2345.)arrow_forwardPlot the value of a two-year European put option with a strike price of $20 on World Wide Plants as a function of the stock price. Recall that World Wide Plants has a constant dividend yield of 5% per year and that its volatility is 20% per year. The two-year risk-free rate of interest is 4%. Explain why there is a region where the option trades for less than its intrinsic value.arrow_forwardWrite and describe the Black-Scholes formulas for pricing European call and put options. The stock price three months from the expiration of an option is R1040, the exercise price of the option is R1000, the risk-free interest rate is 11% per annum, and the volatility is 22% per annum. Calculate the prices of European call and put options.arrow_forward
- A) It is now January. The current interest rate is 5% per annum annual compounding. The June future price for gold is $1846.30, while the December future rice is $1860.00. Find a strategy to explore the arbitrage opportunity. B) Suppose that the spot price of the euro is currently $1.5 USD. The one-year futures price is $1.55 USD. Is the interest rate higher in the United States or the euro zone? Justify your answer. C) OneAsx has just introduced a single-stock futures contract on Arandex stock, a company that currently pays no dividends. Each contract calls for delivery of 1,000 shares of stock in one year. The T-bill rate is 6% per year annually compounded and Arandex stock currently sells at $120 per share. If the Arandex price drops by 3%, what will be the change in the future price and the change in the investors’ margin account who has a long position in one contract?arrow_forwardA stock price is currently $100. Over each of the next two six-month periods it is expected to go up by 10% or down by 10%. The risk-free interest rate is 8% per annum with continuous compounding. What is the value of a one-year European call option with a strike price of $100? What is the value of a one-year European put option with a strike price of $100? Verify that the European call and European put prices satisfy put–call parity.arrow_forwardA one-month European call option on a non-dividend-paying stock is currently selling for $1. The stock price is $47, the strike price is $50, and the risk-free rate is 6% per annum (continuously compounded). What is the time value of a one-month European put on the same stock with the same strike price? A. $3.00 B. $3.75 C. $0.75 D. $0.00arrow_forward
- Consider an underlying stock worth $100 today and will either increase by 25 % or decrease by 20 % in value in six months. In the following six months, it will either increase by 25 % or decrease by 20 %. The risk-free rate semi-annually is 1 %. a ) What is the price of a European put with a strike price of $ 105? b ) What is the price of an American put with a strike price of $ 105?arrow_forwardA stock is selling today for $110. The stock has an annual volatility of 64 percent and theannual risk-free rate is 7 percent.a. Calculate the fair price for a 1-year European call option with an exercise price of $95.b. Calculate how much the current stock price would need to change for the purchaser ofthe call option to break even in one year.c. Calculate the fair price for a 1 year European put option with an exercise price of $95arrow_forwardConsider a stock in two periods (two years). The stock price goes up by 30% or down by 10%in each period. Current stock price is $100. There is a European put option on the stock withexercise price $110 and time to maturity of two years. The interest rate in each period is 6%. Inthe template, Date 0 denotes today, Date 1 denotes the end of year 1 and Date 2 denotes the endof year 2. Use the two-period binomial tree model and discrete discounting to find the put optionprice on Date 0.arrow_forward
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