Chapter 5, Problem 33QA

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?…

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