1. The premium (p) on a pound put option is $.03 per unit. The exercise price is $1.60. The break-even point is _______ for the buyer of the put, and _______ for the seller of the put. (Assume zero transactions costs and that the buyer and seller of the put option are speculators.). Please draw the graph based on the calculation.

2. You purchase a 3-month call option on euro for a premium of $0.03 per unit, with an exercise (strike) price of $1.26; the option will not be exercised until the expiration date, if at all. You borrowed the money for the premium at 5% continuous compounding rate. If the euros market price on the expiration date (t = 3/12) is $1.46, how much is your net profit/loss per unit in dollars and in euros? Graph + calculations

3. Biogen expects to receive royalty payments totaling 1.25 million next month. It is interested in protecting these receipts against a drop in the value of the pound. It can sell 30day pound futures (futures contract size of 62,500 ) at a price of $1.6513 per pound or it can buy pound put options with a strike price of $1.6612 at a premium of 2.0 cents per pound. The spot price of the pound is currently $1.6560, and the pound is expected to trade in the range of $1.6250 to $1.7010. Biogen's treasurer believes that the most likely price of the pound in 30 days will be $1.6400.

Diagram Biogen's profit and loss associated with the put option position and the futures position within its range of expected exchange rates. Ignore transaction costs and margins?

4. Company A, a French manufacturer, desires to borrow U.S. dollars at a fixed rate of interest for one year. Company B, a U.S. multinational, wishes to borrow euro at a fixed rate of interest for one year. They have been quoted the following rates per annum (adjusted for differential tax effects):

Company	Euro	U.S. Dollar
Company A	10.6%	7.0%
Company B	11%	6.2%

1. Design a swap that will net a bank, acting as intermediary, 20% of QSD (quality spread differential) per annum and that will generate a gain of 50% of QSD per annum for A and 30% of QSD for company B. [1 Points]

QSD?

1. b. Suppose that the notional value of swap is $11 million and 10 million at the initial spot exchange rate of S₀(1.10/euro). Calculate gains (losses) for the intermediary bank if the exchange rate will be S₁($0.95/euro) one year from now.

Thanks!