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1. (s points) Suppose the dollars per pound spot rate is $1.31/ and the 12-month forward rate implies a forward discount of 4.00% on the
1. (s points) Suppose the dollars per pound spot rate is $1.31/ and the 12-month forward rate implies a forward discount of 4.00% on the pound. What must be the 12-month forward rate? (hint: The pound is traded at a discount in the forward market, compared to spot trades] 2. (5 points) Suppose the three-month forward rate for the Indian rupees (INR) per Japanese yen (JPY) was INR 0.75/JPY, while the spot rate at the time was INR 0.73/JPY. A scientist located in New York speculates that the spot rate three months later will be INR 0.77/JPY. They decided to devote 500,000 yen in order to try to profit from this speculation, by making a trade in the forward market. Describe the cash flows and the profit if the prediction comes true (Specify the amounts and currencies). [hint: the trade was made in the forward market; it was not a buy-and-hold strategy of nor z] 3. (10 points) An option trader purchased a call option on Russian ruble (P) with a strike price of $0.01350/P, at a premium of 0.00040 dollars per ruble and with an expiration date three months from now. The option is for P2,500,000. (a) What would be the trader's profit or loss if the spot rate at maturity is $0.01310/P? (b) What would be the trader's profit or loss if the spot rate at maturity is $0.01380/P? 4. (20 points) Consider the following option contract on the Euro: It is a call option for 125,000 euros, with settlement prices in terms of US dollars per one euro (i.e., if exercised, 125,000 will be delivered in exchange for the appropriate number of dollars) The strike price is 1.2000 dollars per euro, and the premium is 0.0150 dollars per euro. (a) Suppose a trader writes ten of these call option contracts. What would be the trader's profit or loss if the spot rate upon the option expiration is 1.1750 dollars per euro? (b) A different options trader purchased one of these call option contracts. What would be the trader's profit or loss if the spot rate upon the option expiration is 1.850 dollars per euro? (c) Another trader purchased two of these call option contracts. What would be this trader's profit or loss if the spot rate upon the option expiration is 1.225 dollars per euro? (d) Suppose that soon after taking these positions (but before their expiration), the value of the dollar would depreciate substantially, well beyond expectations. Would it benefit the long position in this option or the short position? 5. (20 points) Consider the following option contract on the Euro: It is a put option for 125,000 euros, with settlement prices in terms of US dollars per one euro (i.e., if exercised, euros will be exchanged for the appropriate number of dollars) The strike price is 1.2000 dollars per euro, and the premium is 0.0300 dollars per euro. (a) Suppose a trader entered a long position by buying seven of these put option contracts. What would be the trader's profit or loss if the spot rate upon the option expiration is 1.1950 dollars per euro? (b) A different options trader took a short position in this put option (for seven contracts). What would be the trader's profit or loss if the spot rate upon the option expiration is 1.2050 dollars per euro? (c) Another trader writes seven of these put option contracts. What would be this trader's profit or loss if the spot rate upon the option expiration is 1.1900 dollars per euro? (d) Suppose that soon after taking these positions (but before their expiration), the value of the dollar would depreciate substantially, well beyond expectations. Would it benefit the long position in this option or the short position
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