1. Compare and contrast forward and futures contracts.
2. A. How can corporations use currency futures?

B. How can speculators use currency futures?

3. Differentiate between a currency call option and a currency put option.

4. Compute the forward discount or premium for the Mexican peso whose 90-day forward rate is $0.102 and spot rate is $0.10. State whether your answer is a discount or premium.

5. How can a forward contract backfire?

6. 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?

7. When should a speculator purchase a call option on Australian dollars? When should a speculator purchase a put option on Australian dollars?

10. Randy Rudecki purchased a call option on British pounds for $0.02 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?

13. Brian Tull sold a put option on Canadian dollars for $0.03 per unit. The strike price was $0.75, and the spot rate at the time the option was exercised was $0.72. Assume Brian immediately sold 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?

18. Assume that a March futures contract on Mexican pesos was available in January for $0.09 per unit. Also assume that forward contracts were available for the same settlement date at a price of $0.092 per peso. How could speculators capitalize on this situation, assuming zero transaction costs? How would such speculative activity affect the difference between the forward contract price and the futures price?

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

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