College of Business Administration
Assignment 2 HW chapter 5
International Finance
Dr. Mohammed Magableh
FINA 4314 Section 201
By:
Asma Hussain Alattas
200800353
0
1. Selling Currency Call Options.
Mike Suerth sold a call option on Canadian dollars for $.01 per unit. The strike price was
$.76, and the spot rate at the time the option was exercised was $.82. Assume Mike did
not obtain Canadian dollars until the option was exercised. Also assume that there are
50,000 units in a Canadian dollar option. What was Mike s net profit on the call option?
Premium of Canadian dollars= $ 0.01
Strike price= $0.76
Spot rate= $ 0.82 (amount of unit when purchasing)
Amount per unit paid for buying C$= 0.76+0.01= 0.77
Net profit per unit= 0.82-0.77= 0.05
Net profit= 50,000*0.05= $ 2,500
2. Hedging with Currency Derivatives.
A U.S. professional football team plans to play an exhibition game in the United
Kingdom next year. Assume that all expenses will be paid by the British government, and
that the team will receive a check for 1 million pounds. The team anticipates that the
pound will depreciate substantially by the scheduled date of the game. In addition, the
National Football League must approve the deal, and approval (or disapproval) will not
occur for three months. How can the team hedge its position? What is there to lose by
waiting three months to see if the exhibition game is approved before hedging?
If they expecting the currency will deprecate they better do put option for 1 million
pounds to US dollars when they received the check immediately. If they not they will
lose if the currency deprecate.
1
4. Speculation with Currency Put Option.
Bulldog, Inc has sold Australian Dollar put option at a premium of $0.01 per unit, and
exercise price of $.76 per unit. It has forecasted the Australian dollars lowest level over
the period of concern as shown in the following table. Determine the net profit or loss per
unit to Buildog Inc, if each level occurs and the put options are exercised at that time
$0.72
($0.72-(0.01-0.76))= -0.03loss
$0.73
(0.73-(0.01-0.76))= -0.02 loss
$0.74
(0.74-(0.01-0.76))= -0.01 loss
$0.75
(0.75-(0.01-0.76))= 0.0 no profit or loss
$0.76
(0.76-(0.01-0.76))=0.01 profit
16.Price Movement Of Currency Futures.
Assume that on November 1, the spot rate of the British pound was $1.58 and the price
on December futures contract was $1.59. Assume that the pound depreciated during
November so that by November 30 it was worth $1.51.
a. What do you think happened to the futures prices over the month of November?
Why?
The numbers given shows depreciation during Nov by – 0.07. it could be inflation
or government policies affect the rate at that time.
b. If you had known that this would occur, would you have purchased or sold a
December futures contract in pound on November 1? Explain.
December price was higher by $ 0.01if I was known defiantly I will sell at Dec
contract and gain profit.
2