International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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A speculator enters a futures contract for September delivery (September 19) of £62,500 on February 2. The futures exchange rate is $1.650 per pound. He believes that the spot rate for pounds on September 19 will be $1.700 per pound. The margin requirement is 2 percent.
(a) If his expectations are correct, what would be his rate of return on the investment?
(b) If the spot rate for pounds on September 19 is 5 percent lower than the futures exchange rate, how much would he lose on the futures speculation?
(c) If there is a 65 percent chance that the spot rate for pounds will increase to $1.700 by September 19, would you speculate in the futures market?
B.On October 23, the closing exchange rate of British pounds was $1.70. Calls that would mature the following January with a strike price of $1.75 were traded at $0.10. a. Were the call options in the money, at the money, or out of the money? b. Compute the intrinsic value of the call. c. If the exchange rate of British pounds rises to $1.90 prior to the January option expiration date, what is the percentage return on investment for an investor who purchased a call on October 23?
The spot price of silver is $13.32/oz. The total interest rate on 3-month loan and deposit is .33%.
1. Suppose that the 3-month silver futures contract is actually traded at $13.43/oz. Determine if an arbitrage opportunity is present.
2. If so, what trading strategy takes advantage of this arbitrage opportunity and calculate the payoff strategy?
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