9/6/2015

Anh Le

2581520

HW2 Assignment

FIN465 Chapters 4,5

Instructor: Dr. Blaise Roncagli

Chapter 4 Problems

4.1 Assume the spot rate of the British pound is $1.6610. The expected spot rate one year from now is assumed to be $1.5500. What percentage change does this reflect? Does the pound appreciate or depreciate? Depreciate, -6.68%

4.2 Gigantic Bank expects that the Singapore dollar will depreciate against the dollar from its spot rate of $.46 to $.44 in 90 days. The following interbank lending and borrowing rates exist: (Note: these are annual rates, not 90 day rates.)

Lending Rate Borrowing Rate U.S. dollar 8.0% 8.3%

Singapore dollar23.0% 25.5%

Gigantic Bank considers borrowing 10 million Singapore dollars in the interbank market and investing the funds in dollars for 90 days. Estimate the profits (or losses) that could be earned from this strategy. Should Gigantic Bank pursue this strategy?

SGD 10,000,000 = $4,600,000 (10,000,000 x 0.46) Lend the dollars through the interbank market at 8.0% annualized over a 90day period. The amount accumulated in 90 days is: $4,600,000 x [1+(8% x 90/360)] = $4,692,000 Repay the Singapore dollars loan. The repayment amount on the Singapore dollar is:

10,000,000 x [1 + (25.5% x 90/360)] = SGD 10,637,500= $ 4,680,500 (10,637,500 x 0.44)

The profit: $4,692,000 - $ 4,680,500 = $ 11,500

4.3 General Instruments expects that the pound will depreciate from $1.70 to $1.65 in one year. It has no money to invest, but it could borrow money to invest. It has been approved by a bank to borrow either 1 million dollars or 1 million pounds for one year. It can borrow dollars at 6% or British pounds at 5.5% for one year. It can invest in a risk-free dollar deposit at 4% for one year or a risk-free British deposit at 3% for one year. Determine the expected profit or loss (in dollars) if General Instruments pursues a strategy to capitalize on the expected depreciation of the pound.

Chapter 5 Problems

5.1 Reginald Smyth-Kramer purchased a call option on British pounds for $.03 per unit. The strike price was $1.5750 and the spot rate at the time the option was exercised was $1.5950. Assume there are 31,250 units in a British pound option. What was Reggies net profit on this option?

(1.5950 1.5750 - .03) x 31,250 = -$312.5 5-2 Heidi Katzenjammer purchased a put option on Euros for $.025 per unit. The strike price was $1.2550 and the spot rate at the time the Euro put option was exercised was $1.2250. Assume there are 50,000 units in a Euro option. What was Heidis net profit on the option?

(1.2550 1.2250 - 0.025) x 50,000 = $2505-3 Assume that a September futures contract on Japanese Yen was available in March for $.065 per Yen. Also assume that forward contracts were available for the same settlement date at a price of $.060 per Yen. How could speculators capitalize on this situation, assuming zero transaction costs? How would such speculative activity affect the difference between the forward contract price and the futures price?

5-4 Helena Handbasket Corporation has sold New Zealand dollar put options at a premium of $.04 per unit, and an exercise price of $.56 per unit. It has forecasted the New Zealand dollars lowest level over the period of concern as shown in the following table. Determine the net profit (or loss) per unit to Helena, if each level occurs and the put options are exercised at that time.

Possible ValueNet Profit (Loss) to

of New Zealand DollarHelena if Value Occurs

$.51.09

.52.08

.53.07

.54.06

.55.055-5 Compute the annualized forward discount or premium for the Mexican peso whose 90-day forward rate is $0.1050 and spot rate is $0.1200. State whether your answer is a discount or premium.

(0.105-0.12)/0.12) x (360/90) = -0.72%It is a discount

5-6 Sherwin-Williams has expects to collect a Euro-denominated receivable of 100,000 in 120 days. The current spot rate of the euro is $1.3334 and the 120 forward rate quoted today is $1.3274. Sherwin is worried that the euro will depreciate over the next 120 days, reducing the dollar value of their euro receivable. To hedge this risk, they enter into a forward contract with their bank to sell euros forward at the forward rate of $1.3274. Assume that 120 days later, Sherwin collects the 100,000 receivable and executes the contract. Assume also that the spot rate at that time is $1.3200.(a) How many dollars did Sherwin get for their euros by executing the contract?

100,000 x [(1.3274-1.32)/ 1.32] x (360/120) = $1,681.82 (b) How many dollars would Sherwin have received if they had not hedged with a forward contract but instead sold their euro receivable in the spot market?(c) Now assume that the spot rate at the time the receivable is collected is $1.3355. What is the opportunity cost to Sherwin of having to execute the forward contract instead of selling their euros on the spot market?

Final Deliverable a single file in Microsoft Word format containing your answers to the questions above. You should paste charts or excel spreadsheets into your Word file to support your answers if appropriate. The format for the file name should be yourlastname FIN465 HW2.doc .Page 2 of 3