BF2207 Question 2 Suppose that, six months ago, you sold a call option on 1,000,000 euros (EUR) with an expiration date of six months and an exercise price of 1.1780 United States dollars (USD). You received a premium on the call option of 0.045 USD per unit. Assume the following: Money market interest rates for EUR are constant through time and equal 5% for all maturities. Money market interest rates for USD are constant through time and equal 3% for all maturities. You may borrow and lend at the money market interest rates Six months ago, the spot rate of the EUR was 1.1900 USD and the one-year forward rate exhibited an annualized discount of 2%. From six months ago to today, the EUR has appreciated against the dollar by 4% (non-annualized). Futures prices are equal to forward rates. Estimak profits from Today the call option will be exercised (if it is feasible for the buyer to do so). Cal 9 Determine the total USD amount of your profit or loss from your position in the call option (8 marks) (b) Suppose that interest rate parity holds. What is today's six-month forward premium or discount? (6 marks) Now assume that, six months ago, you sold a futures contract on 1,000,000 EUR with a settlement date of one year instead of taking a position in the call option. Suppose you reverse your futures position today, i.e., you buy a futures contract on 1,000,000 EUR with a settlement date of six months to offset your earlier futures position. If interest rate parity holds, determine the total USD amount of your profit or loss. (8 marks) (TOTAL: 22 marks) Estimak profits for Today the call option will be exercised (if it is feasible for the buyer to do so). Determine the total USD amount of your profit or loss from your position in the call option. (8 marks) (b) Suppose that interest rate parity holds. What is today's six-month forward premium or discount? (6 marks) (c) Now assume that, six months ago, you sold a futures contract on 1,000,000 EUR with a settlement date of one year instead of taking a position in the call option. Suppose you reverse your futures position today, i.e., you buy a futures contract on 1,000,000 EUR with a settlement date of six months to offset your earlier futures position. If interest rate parity holds, determine the total USD amount of your profit or loss. (8 marks) (TOTAL: 22 marks)