Chapter 5

1.Chapter 5, Question 6. Hedging with Currency Options When would a U.S. firm consider purchasing a call option on euros for hedging? When would a U.S. firm consider purchasing a put option on euros for hedging?

2.Chapter 5, Question 7. Speculating with Currency Options When should a speculator purchase a call option on Australian dollars? When should a speculator purchase a put option on Australian dollars?

3.Chapter 5, Question 10. Speculating with Currency Call Options Randy Rudecki purchased a call option on British pounds for $.02 per unit. The strike price was $1.45, and the spot rate at the time the option was exercised was $1.46. Assume there are 31,250 units in a British pound option. What was Randys net profit on this option?

4.Chapter 5, Question 11. Speculating with Currency Put Options Alice Duever purchased a put option on British pounds for $.04 per unit. The strike price was $1.80, and the spot rate at the time the pound option was exercised was $1.459. Assume there are 31,250 units in a British pound option. What was Alices net profit on the option?

5.Chapter 5, Question 12. Selling Currency Call Options Mike Suerth sold a call option on Canadian dollars for $.01 per unit. The strike price was $.76, and the spot rate at the time the option was exercised was $.82. Assume Mike did not obtain Canadian dollars until the option was exercised. Also assume that there are 50,000 units in a Canadian dollar option. What was Mikes net profit on the call option?

6.Chapter 5, Question 13. Selling Currency Put Options Brian Tull sold a put option on Canadian dollars for $.03 per unit. The strike price was $.75, and the spot rate at the time the option was exercised was $.72. Assume Brian immediately sold off the Canadian dollars received when the option was exercised. Also assume that there are 50,000 units in a Canadian dollar option. What was Brians net profit on the put option?

7.Chapter 5, Question 23. Hedging with Currency Derivatives A U.S. professional football team plans to play an exhibition game in the United Kingdom next year. Assume that all expenses will be paid by the British government, and that the team will receive a check of 1 million pounds. The team anticipates that the pound will depreciate substantially by the scheduled date of the game. In addition, the National Football League must approve the deal, and approval (or disapproval) will not occur for 3 months. How can the team hedge its position? What is there to lose by waiting 3 months to see if the exhibition game is approved before hedging?