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# Homework Problems

Homework Problems

1-Speculating With Currency Options. When should a speculator purchase a call option on Australian dollars? When should a speculator purchase a put option on Australian dollars? Complete each sentence: Speculators should purchase a call option on Australian dollars if they expect the Australian dollar value to ________ substantially over the period specified by the option contract. Speculators should purchase a put option on Australian dollars if they expect the Australian dollar value to ________ substantially over the period specified by the option contract.

 Appreciate, appreciate Depreciate, appreciate Appreciate, depreciate Depreciate, depreciate

2-Currency Call Option Premiums. List the factors that affect currency call option premiums and briefly explain the relationship that exists for each. Do you think an at-the-money call option in euros has a higher or lower premium than an at-the-money call option in Mexican pesos (assuming the expiration date and the total dollar value represented by each option are the same for both options)? The factors are listed: The higher the existing spot rate relative to the strike price, the _______ is the call option value, other things equal. The longer the period prior to the expiration date, the ________ is the call option value, other things equal. The greater the variability of the currency, the greater is the call option value, other things equal. The at-the-money call option in euros should have a _____ premium because the euro should have less volatility than the peso (assuming that the expected volatility of the euro is lower than that of the peso).

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 Greater, greater, lower Greater, greater, higher Lesser, greater, lower Lesser, greater, higher

3-Currency Options. Differentiate between a currency call option and a currency put option. Complete this sentence: A currency call option provides the _____ to ______a specified currency at a specified price within a specified period of time. A currency put option provides the _____to _____a specified currency for a specified price within a specified period of time.

 Right, sell, right, purchase Obligation, purchase, obligation, sell Right, purchase, right, sell Obligation, sell, obligation, purchase

4-Speculating With Currency Call Options. Randy Rudecki purchased a call option on British pounds for \$.02 per unit. The strike price was \$1.45, and the spot rate at the time the option was exercised was \$1.46. Assume there are 31,250 units in a British pound option. What was Randy’s net profit on this option?

 –\$42.75 \$312.50 –\$312.50 \$42.75

5-Hedging With Currency Derivatives. Assume that U.S. firms that have no other foreign transactions anticipate the forward purchase transaction. What are possible ways to hedge the transactions according to the following scenario? Yale Corp. has a subsidiary in Australia that will be remitting funds to the U.S. parent.

 Forward sale, sell futures, purchase puts Forward purchase, buy futures, purchase calls Forward purchase, sell futures, purchase puts Forward purchase, buy futures, purchase puts

6-Speculating With Currency Put Options. Alice Duever purchased a put option on British pounds for \$.04 per unit. The strike price was \$1.80, and the spot rate at the time the pound option was exercised was \$1.59. Assume there are 31,250 units in a British pound option. What was Alice’s net profit on the option?

 –\$5,312.50 \$5,312.50 \$497.70 –\$497.70

7-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?

 \$13,450.50 –\$13,450.50 \$2,500 –\$2,500

8-Hedging With Currency Derivatives. Assume that U.S. firms that have no other foreign transactions anticipate the forward purchase transaction. What are possible ways to hedge the transactions according to the following scenario? Georgetown Co. plans to purchase Japanese goods denominated in yen.

 Forward purchase, sell futures, purchase puts Forward sale, sell futures, purchase puts Forward purchase, buy futures, purchase puts Forward purchase, buy futures, purchase calls

9-Hedging With Currency Options. When would a U.S. firm consider purchasing a call option on euros for hedging? When would a U.S. firm consider purchasing a put option on euros for hedging? Complete each sentence: A call option can hedge a firm’s future _______ denomin-ated in euros. It effectively locks in the maximum price to be paid for euros. A put option on euros can hedge a U.S. firm’s future ________ denominated in euros. It effectively locks in the minimum price at which it can exchange euros received.

 Equity, net profit Net profit, equity Receivables, payables Payables, receivables

10-Selling Currency Put Options. Brian Tull sold a put option on Canadian dollars for \$.03 per unit. The strike price was \$.75, and the spot rate at the time the option was exercised was \$.72. Assume Brian immediately sold off the Canadian dollars received when the option was exercised. Also assume that there are 50,000 units in a Canadian dollar option. What was Brian’s net profit on the put option?

 –\$412 –\$350 \$0 \$350