Chapter 5, Problem 28QA

The current exchange rate is €0.92 per U.S. dollar, but you think that U.S. dollar will appreciate to €0.95 per U.S. dollar. If you know the euro-denominated bond is yielding 3%, what return would you expect in U.S. dollars?

Which of the following best describes the terms 'long forward position' and 'short forward position' in foreign exchange trading?   A short forward position is holding a currency for a short duration, while a long forward position is holding it for a longer period.   A short forward position means you have agreed to sell a currency in the future, while a long forward position means you have agreed to buy it in the future.   A long forward position is when you expect the currency's future spot rate to decrease, and a short forward position is when you expect it to increase.   A long forward position means you have agreed to sell a currency in the future, and a short forward position means you have agreed to buy it in the future.

Suppose the current exchange rate is $1.42/€, the interest rate in the United States is 4.0%, the interest rate in the EU is 6%, and the volatility of the $/€ exchange rate is 20%. Using the Black-Scholes formula, the price of a three-month European call option on the Euro with a strike price of $1.45/€ will be closest to: Select one: a. $0.040/€ b. $0.097/€ c. $0.059/€ d. $0.078/€