(1) You have the following quotations and expectations for the British pound:

Present spot rate $1.3200/

Six-month forward rate $1.3500/

Six-month call option on pounds at a strike price of $1.32 and a premium of 4 cents per pound on the Philadelphia Stock Exchange. Your expectation for the spot rate in six months $1.3700/

1. Assume you have $5,000,000 with which to speculate. Ignore transaction cost, taxes, and interest that might be earned on idle cash balances. (5 Marks)

2. If your expectations prove correct, what would be your dollar profit from speculating in

the spot market? (2.5 Marks)

3. What risks are associated with this operation? (2.5 Marks)

2. David Agbo is considering buying ten call options on Swiss franc on the Philadelphia Stock Exchange at a strike price of 54 cents per pound. The contract size is SF62, 500. The option will expire in three months. The premium is 2.0 cents per pound. Ignore the brokerage cost. The spot rate is currently $.5400/SF and the three-month forward rate is $.5525/SF. David Agbo believes that the most likely range for the spot pound in three months will be a low of $.5000/SF to a high of $.6200/SF, but the most likely value will be $.5900/SF.

1. Diagram the profit and loss position as perceived by David Agbo. (4 Marks)

2. Calculate what he would gain or lose at his expected range of future spot prices and at his expected future spot price. (3 Marks)

3. Calculate and show on the diagram the breakeven future spot price. (3Marks)

3)Intelledex, Inc., a robotics manufacturer based in Corvallis, Oregon, has won a bid to deliver robotics equipment to a Swiss automobile company. The bid is SF8 million. Intelledex will receive the entire SF8 million upon delivery of the equipment six months from now. The present spot rate for the Swiss franc is SF8.000/$, and the six-month forward rate is SF8.2000/$. Intelledex can borrow U.S. dollars at 12% per annum or Swiss francs at 17% per annum. Its opportunity cost of capital is 14% per annum.

1. Explain the various ways in which Intelledex could cover its foreign exchange

exposure. (4 Marks)

2. What would the bread-even opportunity cost of capital have to be for them to be

indifferent between the various alternatives? (3 Marks)

3. Explain how economic exposure might change the expected profitability of this

order. (3 Marks)