1) You want to hedge the Brazilian real (BRR) value ofa 1 million Canadian dollar (CAD) inflow using futures contracts. On Brazil's exchange, there is a futures contract for US$100,000 at 1.5 BRR/USS. a) Your assistant runs a bunch of regressions: BRR/CAD]- USS/BRR] BRR/USS] USS/BRR] Which regression is relevant to you? b) If the relevant is 0.83 how many contracts do you buy/sell? c) We assumed that there was a S futures contract in Brazil, with a fixed number of US$ (100,000 units) and a variable BRR/US$ price. What f there is no Brazilian futures exchange? Then, you'd have to go to a US exchange, where the number of BRR per contract is fixed (at, say, 125,000) rather than the number of USS. How many USS/BRR contacts will you buy'? 2) A charitable organization has issued a bond that gives the holder the option to cash in the principal as either 10,000 or 20,000. This asset can be viewed as a 10,000 bond plus a call on 20,000 with a strike price K-0.5/ a) Can the bond also be viewed as a bond plus an option? b) Explain how the two equivalent views are just an application of the Put-Call ari c) Suppose that you observe the following The price of a call option on the European Euro (E) is 0.055 S/. The price of a put option on the is 0.045 S/E. Both options have 135 days left to expiration and a strike price of 0.85 $/C. The current spot rate is 0.89 $/C. The $-risk free rate is 3.5% and the .risk free rate is 3.75% i) Is there an arbitrage opportunity? Why? ii) Calculate the arbitrage profits and show the arbitrage transactions and corresponding cash flows at t-0 (now) and at t-T-135 days later. 1) You want to hedge the Brazilian real (BRR) value ofa 1 million Canadian dollar (CAD) inflow using futures contracts. On Brazil's exchange, there is a futures contract for US$100,000 at 1.5 BRR/USS. a) Your assistant runs a bunch of regressions: BRR/CAD]- USS/BRR] BRR/USS] USS/BRR] Which regression is relevant to you? b) If the relevant is 0.83 how many contracts do you buy/sell? c) We assumed that there was a S futures contract in Brazil, with a fixed number of US$ (100,000 units) and a variable BRR/US$ price. What f there is no Brazilian futures exchange? Then, you'd have to go to a US exchange, where the number of BRR per contract is fixed (at, say, 125,000) rather than the number of USS. How many USS/BRR contacts will you buy'? 2) A charitable organization has issued a bond that gives the holder the option to cash in the principal as either 10,000 or 20,000. This asset can be viewed as a 10,000 bond plus a call on 20,000 with a strike price K-0.5/ a) Can the bond also be viewed as a bond plus an option? b) Explain how the two equivalent views are just an application of the Put-Call ari c) Suppose that you observe the following The price of a call option on the European Euro (E) is 0.055 S/. The price of a put option on the is 0.045 S/E. Both options have 135 days left to expiration and a strike price of 0.85 $/C. The current spot rate is 0.89 $/C. The $-risk free rate is 3.5% and the .risk free rate is 3.75% i) Is there an arbitrage opportunity? Why? ii) Calculate the arbitrage profits and show the arbitrage transactions and corresponding cash flows at t-0 (now) and at t-T-135 days later
