1)

Estimating Profits From Currency Futures and Options.

One year ago, you sold a put option on 400,000 British pounds with an expiration date of one year. You received a premium on the put option of $.03 per unit. The exercise price was $1.38. Assume that one year ago, the spot rate of the British pound was $1.34, the one-year forward rate exhibited a discount of 2%, and the one-year futures price was the same as the one-year forward rate. From one year ago to today, the British pound depreciated against the dollar by 3 percent. Today the put option will be exercised (if it is feasible for the buyer to do so). Show all work and answer all questions.

Determine the total dollar amount of your profit or loss from your position in the put option.

Now assume that instead of taking a position in the put option one year ago, you sold a futures contract on 400,000 British pounds with a settlement date of one year. Determine the total dollar amount of your profit or loss.

2)

Forecasting the Future Spot Rate.

The following information is available today.

	U.S.	Bulgaria
Real rate of interest required by investors	4%	5%
Nominal interest rate	6%	9%
Spot rate	----	$.69
One-year forward rate	----	$.61

Use the forward rate to forecast the percentage change in the Bulgarian lev over the next year.