International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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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?
Suppose that the exchange rate is €1.25 = £1.00.Options (calls and puts) are available on the Philadelphia exchange in units of €10,000 with strike prices of $1.60/€1.00.Options (calls and puts) are available on the Philadelphia exchange in units of £10,000 with strike prices of $2.00/£1.00. For a U.S. firm to hedge a €100,000 receivable,
Multiple Choice
buy 10 put options on the pound with a strike in dollars.
buy 10 call options on the euro with a strike in dollars.
sell 8 put options on the pound with a strike in dollars.
sell 10 call options on the euro with a strike in dollars.
Assume that the Japanese yen is trading at a spot price of 92.04 cents per 100 yen. Further assume that the premium of an American call (put) option with a strike price of 93 is 2.10 (2.20) cents. Calculate the intrinsic value and the time value of the call and put options.
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- A trader wants to form a position by combining two different European calls and two different European puts. The calls have the same expiration dates but have different strike prices. The trader sells one call with strike price of £48 at a price of £1.50, and buys one call with strike price of £50 at £1.00. He buys one put at a strike price of £48 at £0.50 and sells one put at a strike price of £50 at £2.50. Demonstrate how to graph the profits from this spread strategy by first producing a profits table, and then sketching the graph.arrow_forwardConsider the following spot and forward rate quotations for the Swiss franc. S($/SFr) = 0.85 F1($/SFr) = 0.86 F2($/SFr) = 0.87 F3($/SFr) =0.88 Which of the following is true? Multiple Choice The Swiss franc is trading at a forward discount. The Swiss franc is trading at a forward premium. The Swiss franc is probably going to be worth less in dollars in six months. The Swiss franc is definitely going to be worth more dollars in six months.arrow_forwardA call option on Canadian dollar has a strike (exercise) price of $0.75 per CAD. The present CAD exchange rate is $0.77 per CAD. This CAD call option has an intrinsic value of: A) Positive $0.02 per CAD. B) Zero intrinsic value. C) Negative $0.02 per CAD. D) Positive $0.75 per CAD.arrow_forward
- [Elasticity of a bull spread] Consider the following information about 50-strike and 60-strike European put options with the same stock and time to expirationStrike price, K Elasticity, Ω Put premium50 −4.9953 3.729560 −3.4267 9.5865Calculate the elasticity of a 50 − 60 European put bull spreadarrow_forwardConsider a one period binomial model of a currency option on the dollar. Thecurrent (date t = 0) spot exchange rate is S0 = 75 pence per dollar. The spot rateat the end of the period will be either Su = 100 pence or Sd = 60 pence. The UKrisk-free interest rate over the period is rs = 1/3 (33.3333%) and the US risk-freerate of interest is rd = 1/4 (25%). There is a call option with a strike price ofK = 68 pence and a forward contract with a price of F = 80 pence. Show how touse the forward contract and the UK money market to replicate the payoffs to thecall option and hence, find the price of the call option.arrow_forwardA trader focuses principally on the Australian Dollar/Singapore Dollar (A$/S$) cross-rate. The current spot rate is S$0.9/A$. The trader expects after 2 months the cross rate will be S$0.79/A$. The trader plans to purchase an option, and has the following choices: A CALL option on S$ has a strike price of S$0.85/A$ and a premium of A$0.00037/S$. A PUT option on S$ has a strike price of S$0.85/A$ and a premium of A$0.00048/S$. i. Determine if the trader should buy a PUT option or a CALL option on S$. ii. If the trader buys the option decided in (i), determine net profit for the trader if the spot rate after 2 months is as the trader expects. iii. If the spot rate after 2 months is not what the trader expected and is S$0.61/A$, will the option the trader buys be at-the-money, or in-the-money, or out-of-the-money? [[Notably, the trader is purchasing option on S$ -- meaning S$ is the foreign currency in this instance]]arrow_forward
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