Futures & options | Business & Finance homework help
FX Markets – Spot and Forwards
Multiple Choice: #s 1-3
1. The forward Indian Rupee, relative to $, given spot rate of Rps 48.50 and a 3 month forward rate of Rps 50.00 is closest to (annualized):
a. 12 % premium (approx.) b. 12.37% discount c. 12.37% premium
d. 12% discount (approx.) e. 2.91% discount
2. The bid-ask spot rate is quoted as Real 1.8400 -1.8550 per dollar. I want to exchange $500 for real. How many reals will I get?
a. 271.74 b. 920 c. 927.50 d. 269.54
3. Based on Interest Rate Parity in pesos per dollar terms, larger the difference with which peso interest rate exceeds the dollar interest rate, the:
- larger will be the forward discount on the peso
- larger will be the forward premium on the peso
- smaller will be the forward premium on the peso
- smaller will be the forward discount on the peso
4. Interest Rate Parity:
The spot rate on the Brazilian real is quoted at $0.5555 and the six month forward rate at $0.5955. Is the real at a forward premium or discount and how much per annum?
5. In the above problem, is the dollar at a premium or discount and how much per annum?
6. Assume that the annualized interest rates are 3% in U.S. and 8% in Brazil. Is arbitrage profit possible under covered Interest Rate Parity? Why?
7. If the two interest rates are as shown in problem 6 and the spot rate is $0.5555 per real as shown in problem 5, what should be the six-month forward rate so that there is no arbitrage profit possible?
8. Non-deliverable forwards: The spot rate for Argentina peso is P2.75/$ and the six-month forward rate is P2.90 /$. The actual rate settles six months later at P2.85/$. If you entered a six month non-deliverable forward contract today to buy P29 million, what is your gain or loss 6 months later?
Futures & Options
1.Speculation: Today is January 24 and you go long 1 real March futures at an opening trade price of $0.6423 per real with an initial margin of $1,500. The settlement prices for January 24, 25 and 26 are $0.6393, $0.6441 and $0.6496 per real respectively. On January 27 you close out your contract at $0.6483 per real.
(a) Calculate your daily account position and
(b) Find the ending account balance on January 27 at liquidation
(size of contract = real 125,000)
2. Futures Hedging: On March 15, a US firm is planning to import Russian vodka worth 5 million rubles due on April 15. Firm decides to hedge its payables position by using June ruble futures traded on CME. The spot rate on March 15 is US $0.0330/ruble and the June futures price on March 15 is at $ 0.0300/ruble. On April 15, the spot rate is $0.0380 / ruble while the June futures is $ 0.0350 / ruble.
(a) Calculate the net gain or loss from the futures?
(b) What is the net cost to the importer?
3. Options Hedging: On March 15, a US firm is planning to import Indian software worth Rs. 1 million due on April 15 (one day later). Firm decides to hedge its payables position by using OTC April 15 call option on the rupee.
The spot rate is US $0.0220/rupee and the April call for X= $ 0.0200 / rupee is quoted at $0.0010/rupee. On April 15, the spot rate settles at $ 0.0190 / rupee.
What is the cost of the call option in dollars?
Do you exercise the call or not?
What is the dollar payables from options hedging?
4. A U.S. firm can hedge its South African rand receivables against depreciation by:
a. selling rand futures b. buying rand futures
c. buying rand forward d. none of the above