8. The lower bound on a non-degenerate American-style put (that is, a put where there is still some uncertainty about whether Sr > X or not) is: X Assume that ST = 0 and ry = 0. Common sense says that you should exercise the put, since the exchange rate cannot fall any further. Yet the bound P, > X says that the put should trade above its intrinsic value. Where is the fallacy?6. In the preceding question, we assumed that there was a uso futures contract in Germany, with a fixed number of uso (100,000 units) and a variable EUR/USD price. What if there is no German futures exchange? Then you would have to go to a US exchange, where the number of EUR per contract is fixed (at, say, 125,000), rather than the number of usD. How many UsD/EUR contracts will you buy?7. A German exporter wants to hedge an outflow of NZD 1m. She decides to hedge the risk with a EUR/USD contract and a EUR/AUD contract. The regression output is, with t-statistics in parentheses, and R- = 0.59: AS[EUR/NZD] = 0 + 0.15 /(EUR/USD] + 0.7 AfjEUR/AUD] (1.57) (17.2) (a) How will you hedge if you use both contracts, and if a uso contract is for USD 50,000 and the AUD contract for AUD 75,000? (b) Should you use the uso contract, in view of the low t-statistic? Or should you only use the AUD contract?4. On the morning of December 6, you purchased a futures contract for one EUR at a rate of INW/EUR 55. The following table gives the subsequent settlement prices and the p.a. bid-ask interest rates on a INR investment made until December 10. (a) What are the daily cash flows from marking to market? 15:01 on 8 March 2009 P. Sercu, K.U.Leuven SB&E 41 (b) What is the total cash flow from marking to market (ignoring discount- ing)? (c) If you must finance your losses and invest your gains from marking to market, what is the value of the total cash flows on December 10? December 6 7 8 9 10 Futures price 56 57 54 52 55 Bid-ask interest 12.00-12.25 11.50-11.75 13.00-13.25 13.50-13.75 NA rates, INR, % pa.5. You want to hedge the EUR value of a CAD Im inflow using futures contracts. On Germany's exchange, there is a futures contract for usD 100,000 at EUR/USD 1.5. (a) Your assistant runs a bunch of regressions: i. AS[EUR/CAD] = 01 + 81 Af [USDVEUR] ii. AS[EUR/CAD] = 42 + 82 Af [EUR/USD] ifi. AS[CAD/EUR] = 03 + 63 Af [EUR/USD] iv. AS[CAD/EUR] = (4 + B4 Af [USDVEUR] Which regression is relevant to you? (b) If the relevant f were 0.83, how many contracts do you buy? sell?5. You want to hedge the EUR value of a CAD Im inflow using futures contracts. On Germany's exchange, there is a futures contract for usD 100,000 at EUR/USD 1.5. (a) Your assistant runs a bunch of regressions: i. AS[EUR/CAD] = 01 + 81 Af [USLyEUR] ii. AS[EUR/CAD] = 42 + 82 Af [EUR/USD] iii. AS[CAD/EUR] = 03 + 83 Af [EUR/USD] iv. AS[CAD/EUR] = (4 + 84 Af [USLEUR] Which regression is relevant to you? (b) If the relevant f were 0.83, how many contracts do you buy? sell?6. In the preceding question, we assumed that there was a uso futures contract in Germany, with a fixed number of uso (100,000 units) and a variable EUR/USD price. What if there is no German futures exchange? Then you would have to go to a US exchange, where the number of EUR per contract is fixed (at, say, 125,000), rather than the number of UsD. How many usD/EUR contracts will you buy