1. Consider an exporter in the U.S. expecting to receive 100 thousand in three mont hs. Use the following information to answer the questions. All exchange rates are stated with euros as the base currency and dollars as the counter currency. Payment for Exports 100,000 Strike Price Probability App Probability Dep EApp Dep Option Fee 0.5 0.5 1.30 1.06 0.05 a. By what percentage does the Eappreciate relative to the strike price? 50 b. By what percentage does the depreciate relative to the strike price? c. What is the expected exchange rate from the pure market risk in this example? d. Identify and explain changes in the exchange rate that would benefit the exporter and what changes would be costly to the exporter. It weud for benefit him 2ollar t appreciate. dollar the The experter is warned Qbout deprciating and it wreld cost hin e. What type of option should be purchased in this situation? When will the option will be exercised. f. Using the provided figure, illustrate the value of the option if the appreciates and depreciates. Assume the current spot rate is equivalent to the strike rate. Oytion Vale Ex Bate g. Calculate the expected esxchange rate from this option market risk, does the option seem like a good bedge? Conpared to the pe 2. What type of option would an investor purchse if you expected the o depeeciate Explain when the option should be exercised and when it shouldt 3. In Greece you can purchase a one-year 1.000 bond with a 8% return. Consider an investor in the U.S. who might be interested in purchasing the bond. Comparatively, a similar bond in the U.S. only offers a return of 4%. The current exchange rate is eI= $ 1.11. (a) Discuss changes to the exchange rate that will be advantageous or costly to the exporter. (b) Determine the percentage change in the exchange rate that will allow the invest- ment to break even. (c) Suppose the euro to dollar is trading at a forward premium of 2%. Is it worth covering the interest in the forward market? That is, is it worth locking in at the forward rate? Explain. (d) Calculate the net return for this investment if the forward contract is purchased. (e) Suppose the euro to dollar (U.S. direct quote) is trading at a forward discount of 3%. Is is worth locking in at the forward rate in this case? Explain. 1. Consider an exporter in the U.S. expecting to receive 100 thousand in three mont hs. Use the following information to answer the questions. All exchange rates are stated with euros as the base currency and dollars as the counter currency. Payment for Exports 100,000 Strike Price Probability App Probability Dep EApp Dep Option Fee 0.5 0.5 1.30 1.06 0.05 a. By what percentage does the Eappreciate relative to the strike price? 50 b. By what percentage does the depreciate relative to the strike price? c. What is the expected exchange rate from the pure market risk in this example? d. Identify and explain changes in the exchange rate that would benefit the exporter and what changes would be costly to the exporter. It weud for benefit him 2ollar t appreciate. dollar the The experter is warned Qbout deprciating and it wreld cost hin e. What type of option should be purchased in this situation? When will the option will be exercised. f. Using the provided figure, illustrate the value of the option if the appreciates and depreciates. Assume the current spot rate is equivalent to the strike rate. Oytion Vale Ex Bate g. Calculate the expected esxchange rate from this option market risk, does the option seem like a good bedge? Conpared to the pe 2. What type of option would an investor purchse if you expected the o depeeciate Explain when the option should be exercised and when it shouldt 3. In Greece you can purchase a one-year 1.000 bond with a 8% return. Consider an investor in the U.S. who might be interested in purchasing the bond. Comparatively, a similar bond in the U.S. only offers a return of 4%. The current exchange rate is eI= $ 1.11. (a) Discuss changes to the exchange rate that will be advantageous or costly to the exporter. (b) Determine the percentage change in the exchange rate that will allow the invest- ment to break even. (c) Suppose the euro to dollar is trading at a forward premium of 2%. Is it worth covering the interest in the forward market? That is, is it worth locking in at the forward rate? Explain. (d) Calculate the net return for this investment if the forward contract is purchased. (e) Suppose the euro to dollar (U.S. direct quote) is trading at a forward discount of 3%. Is is worth locking in at the forward rate in this case? Explain
