A European put option contract with an exercise price of $1.65 per pound and a contract size of £32,000 is currently trading at a premium of $0.18 per pound. Required: a-1. If you buy this contract, what spot exchange rate at maturity will maximize your profit? a-2. If you buy this contract, what is the amount of the maximum possible profit from one contract? b. If you buy this contract, what is your maximum possible loss from one contract? c. If you sell this contract, what is your maximum possible profit on this contract? d-1. If you sell this contract, what is your maximum possible loss from one contract? d-2. At what future spot exchange rate will you maximize your loss? e. At what future spot exchange rate, will either the buyer or seller of this contract break even?

Q: Suppose that at the present time, one can enter 5-year swaps that exchange SOFR for 4%. An…

A: Notional principal= 110,000,000*(8%-4%)= 110,000,000*4% = 4400000Present Value can be calculated…

Q: Suppose the exchange rate of euro at current spot market is $1.25/€. If a put option has a strike…

A: Option can be in the money, out of the money and at the money

Q: Suppose the spot $/¥ exchange rate is 0.007, the I -year continuously compound dollar - denominated…

A: The forward exchange rate refers to a contract where the rate at which the currencies can be traded…

Q: . What is the value of the put option? (

A:

Q: Required: Suppose a U.S. investor wishes to invest in a British firm currently selling for £90 per…

A: Current Selling Price of the British Firm is £90 per shareCurrent Exchange Rate = $2/£ Possible…

Q: Consider a 4-year 5% bond swap in euros for 1 million notional value. In other words, there will be…

A: a. Net Present Value (NPV) of the Euro PaymentsPV = C/(1 + r)^nFor each year, the cash flow (\(C\))…

Q: A currency speculator wants to speculate on the future movements of the €. The speculator expects…

A: In future contracts there are daily settlements of margin and amount is required to be made in…

Q: a) Assume the euro's spot price at the expiration date (market price) is *123/€ The investor's…

A: A put option starts making profit when the spot price at expiry is below the strike price. The value…

Q: The €/$ spot exchange rate is $1.50/€ and the 90-day forw Multiple Choice O O O $1.65/€ $1.5375/€…

A: Foward contracts are the mutual agreements between two parties for exchange of currencies between…

Q: Use the following information for the next 8 questions. UCD (U.S. based MNC) will receive 250,000…

A: Money market hedge is a non derivative hedging teaquniqe where a domestic merchant locks his…

Q: Give typing answer with explanation and conclusion 1. You enter an NDF to buy UYU (Uruguayan Peso)…

A: NDF is one of the efficient techniques for hedging used for non-deliverable foreign currency.…

Q: Use the following information for the next 8 questions. UCD (U.S. based MNC) will receive 250,000…

A: Here, Amount Receivable in 1 year is 250,000 euros Spot Exchange Rate today is $1.20 per euro One…

Q: You trade in two types of options.  First, you purchase 7 call option contracts on the Euro with an…

A: Calculation of the profit or loss by participating in options is shown below:

Q: Consider the borrowing rates for Parties A and B. A wants to finance a $100,000,000 project at a…

A: Swap: It is  an agreement where  principal amount of a loan and the interest in one currency for the…

Q: Use the following information for the next 8 questions. UCD (U.S. based MNC) will receive 250,000…

A: Forward market is made of Forward contract which is an over the counter derivative instrument which…

Q: Suppose that you have calibrated both HL and BDT models to the yield curve and are trying to price a…

A: The forward contract is that contract in which the one party has agrees to other party of obligation…

Q: To find the quoted price of a 180-day T-bill with a 5% yield and the contract price for a $1,000,000…

A: Treasury bills are short term debt securities issued by U.S. Department of the treasury serves as an…

Q: Assume that the one-year interest rate is 3% p.a. in the UK and 2% p.a. in the Euro area. Also,…

A: Step 1: Analyzing the Interest Rate Parity (IRP) TheoryAccording to the IRP theory, the forward…

Q: Suppose the risk free rate in pounds (£) is 5.71% and the risk free rate in US dollars ($) is 7.95%.…

A: The covered interest rate parity ensures the determination of future exchange rates without…

Q: The current spot exchange rate is 1.27 $/ BP. Your customer is an importer from Britain. He will…

A: A call option is used to hedge against the probable loss due to the decline in the value of…

Q: A put option is written on €100 with a strike price of $1.00 = €1.00. In one period, there are two…

A: gain on call option if price is $1.15 = €1.00 is 0.15.gain on call option if price is $0.85 = €1.00…

Q: Your firm purchased an equipment from a British company. Total cost was £50,000 (in 30 days). The…

A: Determining the maximum (or minimum) strike price for the option, you will want to choose a strike…

Q: loss of $6,250 loss of $10,000 gain of $625

A: Put option gives you opportunity to sell currency on expiration but there is no obligation to do…

Q: American Express sells a call option on euros (contract size is €500,000) at a premium of $0.04 per…

A: Here, Contract size = €500,000 Call Premium = $0.04 per euro. Exercise price = $0.91 Spot price of…

Q: 6) Based on the following information about the future poss foreign assets, you have computed…

A: Given informationvariance of foreign asset return VAR(S)=0.00666667covariance between portfolio…

Q: i sold a call option with an exercise price of $1.20/euro. the premium was $0.02/euro. what is my…

A: Buyer of Call option will exercise the option if Price is higher than the Exercise Price. For seller…

Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in the near past and is expected to be more affluent in the future. The use of exchange-traded derivative financial instruments has been multi-folded to provide for the requirements of various MNCs and offshore potential investors. Most banks and financial institutions have helped integrate the global economies. Our Government has introduced some bold and extreme measures to fulfil the purpose behind the fiscal, industrial, and monetary policies. The enactment of GST is a huge step towards streamlining the taxation system of the country. Owing to Covid-19, this aspect of corporate risk management has become critical.