1) An investor enters into a short forward contract to sell 100,000 British pounds for U.S. dollars at an exchange rate of 1.3000 USD per pound. How much does the investor gain or lose if the exchange rate at the end of the contract is (a) 1.2800 and (b) 1.3300? 4 Marks 2) Explain carefully the difference between hedging, speculation, and arbitrage. 5 Marks 3) What is the difference between a long forward position and a short forward position? 5 Marks 4) What is the difference between a forward contract to buy an asset at $20 and a call option to buy the same asset for $20? 4 Marks 5) The price of a stock on July 1 is $57. A trader buys 100 call options on the stock with a strike price of $60 when the option price is $2. The options are exercised when the stock price is $65. Find the trader's net profit? 4 Marks 6) One Apple juice future contract is on 15,000 pounds of frozen concentrate. Suppose that in September 2014 a company sells a March 2016 apple juice futures contract for 120 cents per pound. In December 2014 the futures price is 140 cents; in December 2015 the futures price is 110 cents; and in February 2016 it is closed out at 125 cents. The company has a December year end. What is the company's profit or loss on the contract? How is it realized? 4 Marks 7) Trader X enters into futures contracts to buy 1 million euros for 1.3 million dollars in three months. Trader Y enters in a forward contract to do the same thing. The exchange rate (dollars per euro) declines sharply during the first two months and then increases for the third month to close at 1.3300. Ignoring daily settlement, what is the total profit of each trader? When the impact of daily settlement is taken into account, which trader does better? 4 Marks 1) An investor enters into a short forward contract to sell 100,000 British pounds for U.S. dollars at an exchange rate of 1.3000 USD per pound. How much does the investor gain or lose if the exchange rate at the end of the contract is (a) 1.2800 and (b) 1.3300? 4 Marks 2) Explain carefully the difference between hedging, speculation, and arbitrage. 5 Marks 3) What is the difference between a long forward position and a short forward position? 5 Marks 4) What is the difference between a forward contract to buy an asset at $20 and a call option to buy the same asset for $20? 4 Marks 5) The price of a stock on July 1 is $57. A trader buys 100 call options on the stock with a strike price of $60 when the option price is $2. The options are exercised when the stock price is $65. Find the trader's net profit? 4 Marks 6) One Apple juice future contract is on 15,000 pounds of frozen concentrate. Suppose that in September 2014 a company sells a March 2016 apple juice futures contract for 120 cents per pound. In December 2014 the futures price is 140 cents; in December 2015 the futures price is 110 cents; and in February 2016 it is closed out at 125 cents. The company has a December year end. What is the company's profit or loss on the contract? How is it realized? 4 Marks 7) Trader X enters into futures contracts to buy 1 million euros for 1.3 million dollars in three months. Trader Y enters in a forward contract to do the same thing. The exchange rate (dollars per euro) declines sharply during the first two months and then increases for the third month to close at 1.3300. Ignoring daily settlement, what is the total profit of each trader? When the impact of daily settlement is taken into account, which trader does better? 4 Marks