Chapter 5, Problem 31QA

There is a European call option on the dollar with strike price of Kc = 94 pence per dollar and a European put option on the dollar with a strike price of Kp = 100 pence per dollar. Both have a notional N = 1 and both expire at date T. The current (date t) price of one dollar is St = 100 pence. The current prices of call option is 27.5 (55/2) pence and the price of the put option is 8.33 (25/3) pence. The sterling interest rate for borrowing and lending between dates t and T is 20% (1/5) and the corresponding dollar interest rate is 25% (1/4). Whatarethecurrent (datet) intrinsic and time value of the call and put options?

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?…

Malibu, Inc., is a U.S. company that imports British goods.  It plans to use call options to hedge payables of 100,000 pounds in 90 days.  Three call options are available that have an expiration date 90 days from now.  Fill in the number of dollars needed to pay for the payables (including the option premium paid) for each option available under each possible scenario.                                           Spot Rate                                          of Pound                 Exercise Price                   Exercise Price                   Exercise Price                                           90 Days                        = $1.71;                              = $1.76;                              = $1.80;           Scenario             from Now              Premium = $.04              Premium = $.06              Premium = $.03                  1                          $1.65                  2                            1.74                  3…

Assume that the Japanese yen is trading at a spot price of 92.04 cents per 100 yen. Further assume that the premium of an American call (put) option with a strike price of 93 is 2.10 (2.20) cents.  Calculate the intrinsic value and the time value of the call and put options.

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?

Calandra Panagakos works for CIBC Currency Funds in Toronto. Calandra is something of a contrarian—as opposed to most of the forecasts, she believes the Canadian dollar (C$) will appreciate versus the U.S. dollar over the coming 90 days. The current spot rate is $0.6750/C$. Calandra may choose between the following options on the Canadian dollar. Option Strike Price Premium Put on C$ $0.7000 $0.00003/S$ Call on C$ $0.7000 $0.00049/S$ Should Calandra buy a put on Canadian dollars or a call on Canadian dollars? What is Calandra’s break-even price on the option purchased in part (a)? Using your answer from part (a), what is Calandra’s gross profit and net profit (including premium) if the spot rate at the end of 90 days is indeed $0.7600? Using your answer from part (a), what is Calandra’s gross profit and net profit (including premium) if the spot rate at the end of 90 days is $0.8250?

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.   1How should UCD utilize the forward market to hedge the exchange rate risk for its future receivables? And what shall be the amount received based on this hedging strategy? (Note: UCD can only buy or sell the forward contract at the forward rate available in the forward market described in bullet 3.)