1. Using Exhibit 7.3, calculate the timing and number of futures contracts needed for the following purposes:
a. An importer needs to buy €150,000 on July 10th.
€150,000/125,000 = 1 September contract and €25,000 short position open
b. An exporter will receive ¥321,400,000 on October 21st.
¥321,400,000/12,500,000 = 26 December contracts with a short position of ¥3,600,000
c. You want to take a short position in £ to a maximum amount of $500,000. (The
spot rate is £1.80)
$500,000/1.80 = ₤277,778/62,500 = 4 nearest month contracts
Currency Options Data
CurrencyStrike PriceCall PremiumPut Premium
2a. What kind of currency option does an importer in € need? At what future spot rate will this option be profitable?
Must buy €, so need a call option. This option will break even and begin to become profitable when the € rises more than the option premium. €1.2600 + .0189 = €1.2789
b. Same questions for an exporter in ¥.
Must sell ¥, so need a put option. This option will break even and begin to become profitable when the ¥ falls more than the option premium. ¥.9500 - .0130 = ¥.9370
c. Same questions for a speculator that thinks ₤ will depreciate.
Needs a put option to benefit from a fall in ₤. Breaks even at ₤1.8200 - .0244 = ₤1.7956
3a. At what rate will the combination of the import payment and the option be profitable?
The call option is exercised to cover the risk that € may appreciate. Gains or profits are generated by a depreciation of the € and begin after the break even point which is €1.2600 - .0189 = €1.2411
b. At what rate will the combination of the export receivable and option be profitable?
The put option is exercised to cover the risk that the ¥ depreciates. Gains or profits are generated by an appreciation of the ¥ and...