A Pissanut Co. has purchased Australian dollar call options for speculative purposes. Each option was purchased for a premium of USD0.015 per unit, with an exercise price of USD0.6500 per unit. Pissanut Co. will purchase the Australian dollar before it exercises the options (only if it is feasible to exercise the options) It plans to wait until the expiration date before deciding whether to exercise the options. In the following table, fill in the net profit (or loss) per unit to Prosperous Co. based on the listed possible post rates of the Australian dollar on the expiration date. 

 

Possible Spot Rate of New Zealand Dollar on Expiration Date Net Profit (Loss) Per unit for Pissanut Co. (USD)

USD 0.6700

USD0.6650

USD0.6500

USD0.6495

USD0.6455

B.Uzair is speculating in the movement of USD and EUR. Uzair has USD 10 million to begin with, and Uzair must state all profits at the end of any speculation in USD. The spot rate on the euro is USD0.885/EUR, while the 30-days forward rate is USD0.900/EUR. (Note: State all answer in USD)

I.If Uzair believes the euro will continue to slide in value against the U.S. dollar, and he expects the spot rate to be USD0.800/EUR at the end of 30 days, what should he do?

II.If Uzair believes the euro will appreciate in value against the U.S. dollar, and he expects the spot rate to be USD0.950/EUR at the end of 30 days, what should he do?

QUESTION TWO

Recently, FEMTECH, a United Stated (U.S) based manufacturing company that specialised in electronics purchased a Korean company that produces some of the main materials used for production. The purchase price was Won39 million. Currently, FEMTECH has paid Won9 million, and the remaining balance, which is Won30 million is due in 6-month. Using the following information, what are the available financial contracts available for FEMTECH to deal with, recommend a hedging strategy and why?

Current spot rate is Won1,116.55/$

6-month Forward rate is Won1,147.88/$.

6-month Korean Won interest rate is 6% per annum

6-month U.S. dollar rate is 2.50% per annum

Weighted average cost of capital (WACC) is 8%

6-month call option on won is Won1,140/$ strike rate with a 2.80% premium

6-month put option has the same strike rate with a 2.40% premium

FEMTECH could invest at these interest rates or borrow at 2% per annum above those rates.