(a) A Tanzania speculator is considering the purchase of five three-month Japanese Yen call option contracts with a strike of TAS 15.81 Japanese. The premium is TAS 0.15 PER Yen and the contract size is 1,000,000 Japanese Yen. The speculator believes the Yen will appreciate to : TAS 17.70 19.80 over the next three months. REQUIRED: As the speculators assistant, you have been asked to do the following: (i) Determine the speculators total profit on the five contracts if the Yen appreciated to : TAS 17.70 19.80 (2marks

(ii) Determine the speculators total profit on the five contracts if the Yen appreciated only to the forward rate. (2marks)

(iii) Determine the future spot rate at which the speculator will only break even (2marks)

(iv) Determine the future spot rate at which the speculator will realize a speculative profit amounting to TAS (2marks)

(b) The current spot exchange rate is TZS/ 1550 1560 and the three month forward rate is TZS 1500 1511. On the basis of your analysis of the exchange rates, you are very well confident that the spot exchange rate will be TZS/ 1520 1533 in three months. Assuming that you would like to buy or sell 100,000.

REQUIRED:

(i) What actions do you need to take speculate in the forward market? What is the expected TZS profit from the speculation? (ii) What would be your speculative profit in TZS terms if the spot exchange rate actually turns out to be TZS/ 1510 1522?