Foreign Currency Bid Ask GBP/1USD 0.80000 GBP/1USD 0.83000 GBP/1USD CNY /1USD 6.6000 CNY /1USD 6.9000 CNY /1USD USD/1EUR Spot 1.10000 USD/1EUR 1.25000 USD/1 EUR USD/1EUR 6 month 1.20000 USD /1EUR 1.30000 USD /1EUR a. You want to sell 1,000,000 British pounds (GBP). How many US dollars will you get? b. You want to Buy 10,000,000 Chinese Yuan Renminbi (CNY). How many U.S. dollars will you pay? c. You need to buy 5,000,000 Euros for 6 months forward. How many dollars (USD) do you pay? How many would spot have been? Has the Euro appreciated or depreciated. d. Explain how foreign exchange dealers make money. e. Define direct quote and give an example. 2. On Monday morning, an investor takes a long position in a pound futures contract that matures on Thursday afternoon. The agreed upon price is $1.50. The contract size is 62,500. At the close of trading on Monday, the futures price goes to $1.65. At Tuesday close, the price goes to $1.70. At Wednesday close, the price goes to $1.45, and on Thursday close the price goes to $1.30 and the contract matures. The initial performance bond is $2500 and the maintenance performance bond is $1500. Detail the daily settlement process. What will be the investor's profit (loss)? (15 points). a. Carefully detail the daily settlement process. What will be the investor's profit (loss) for each day? What is the total profit or loss for the period? b. What would the profit or loss be if the investor had taken a short position (you do not need to detail the daily settlement process for this question? c. Why are futures contracts important in risk management and international business? 3. Gabby Aranguiz writes a call option on British pounds for $.05 per unit. The strike price is $1.50 = 1 pound. Assume there are 31,250 units in a British pound option. What is Gabbys net profit or loss on this option for the following rates; 1.30/, 1.40/, 1.43$/, 1.50$/, 1.53$/, 1.55$/, 1.60$/, 1.70/,? Indicate if the option is in the money, at the money, or out of the money. Draw an appropriate graph of your results. Why would Gabby write a call option? Why would someone buy a call option? (10 points). 4. Carlos Bernotti buys a put option on British pounds for $.05 per unit. The strike price is $1.50 = 1 pound. Assume there are 31,250 units in a British pound option. What is Carloss net profit or loss on this option for the following rates; 1.30/, 1.40/, 1.43$/, 1.450$/, 1.50, 1.55$/, 1.60$/ 1.70/,? Indicate if the option is in the money, at the money, or out of the money. Draw an appropriate graph of your results. Why would Carlos buy a put option? Why would someone write a put option? (10 points) 5. Answer the following questions regarding options. Draw a graph to explain your answer. (10 points)

a. Carefully explain a collar option strategy is and why it is used. b. Carefully explain a protective put option strategy and why it is used. c. Carefully explain a bear strategy and bull strategy and why they are used. 6. You are worried about the current economic situation in Europe. Several countries are having debt problems that could affect the value of the Euro. You have no idea what will happen to the value of the currency so you want to use options to take advantage of this uncertainty. Use the information below to construct an appropriate strategy. Carefully explain the strategy and when it would be appropriate to use such a strategy. (15 points) Put and call options are available for Euros with the following information. Call option Premium on Euros = 0.03 USD per Euro Put Option Premium on Euros = 0.02 USD per Euro Strike prices available on Euros for both puts and calls are 1.30 USD = 1 Euro. Complete the table below: Draw a graph.

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Spot Rate of Euro at time t

7. Assume the following information: Spot rate of New Zealand dollar (NZ$) 1NZ$ = 0.500 USD One year forward rate of New Zealand dollar (NZ$) 1NZ$ = 0.600 USD One year New Zealand interest rate = 15% One year U.S. interest rate = 5% Given this information, is it worthwhile for a New Zealand investors (who currently has New Zealand Dollars) to invest in the U.S.? Carefully explain and illustrate (using a flow chart) your answer. (15 points) 8. Carefully explain the difference between forward, futures, and options contracts. Make sure to indicate any advantages and disadvantages of each type of contract. How are these contracts used by companies involved in international trade? (10 points)