Open interest 127,331 5.904 105,183 9.962 138,199 10.974 QUESTION 2 (30 MARKS) a. Below is a quotation for CME Group Currency Futures Contract Open High Low Settle Change Currency Futures Japanese Yen (CME) - V12,500,000; S per 100% June 1.0994 1.0994 1.0828 1.0849 -0.0114 September 1.0996 1.1008 1.0846 1.0866 -0.0144 Canadian Dollar (CME) - CAD100,000; S per CAD June 0.9482 0.9641 0.9457 0.9615 0.0094 September 0.9482 0.9636 0.9453 0.9610 0.0094 British Pound (CME) - 62,500; S per June 1.4646 1.4772 1.4554 1.4643 -0.0020 September 1.4655 1.4774 1.4557 1.4646 -0.0020 Swiss Franc (CME) - CHF125,000; S per CHF June 0.8644 0.8676 0.8621 0.8655 -0.0003 September 0.8686 0.8701 0.8646 0.8679 -0.0004 Australian Dollar (CME) - AUD100,000; S per AUD June 0.8295 0.8413 0.8265 0.8354 -0.0014 September 0.8213 0.8326 0.8180 0.8268 -0.0013 Mexican Peso (CME) - MXN500,000; S per 10MXN June 0.77075 0.78175 0.76850 0.78000 0.00700 September 0.76475 0.77400 0.76175 0.77275 0.00725 Euro (CME) - 125,000; S per June 1.2216 1.2276 1.2175 1.2240 -0.0018 September 1.2229 1.2288 1.2189 1.2253 -0.0018 Euro/British Pound (CME) - 125,000; per June 0.83300 0.83805 0.82800 0.83590 0.00010 September 0.83040 0.83855 0.83000 0.83665 0.00005 46,450 3.496 104,151 6,247 78,059 751 255,420 19,335 11,107 170 Euro/Japanese Yen (CME) - 125,000; per June 111.18 113.05 111.09 September 112.50 112.71 111.60 112.82 112.78 1.01 1.01 7,309 527 Euro/Swiss Franc (CME) - 125,000; CHF per June 1.7048 1.6860 1.6919 September 1.6875 -0.0017 -0.0015 626 3 i. Evaluate the face value of the open interests in for the month of June and September for Euro/Japanense yen futures contracts and Australian dollar futures contract. (6 marks) ii. In September, Mexican peso futures contract has a price of $0.7725 per 10MXN. You believe the spot price in September will be $0.83800 per 10MXN. What speculative position would you enter into to attempt to profit from your beliefs? Quantify your anticipated profits, assuming you take a position in three contracts. What is the size of your profit (loss) if the futures price is indeed an unbiased predictor of the future spot price and this price materializes? (12 marks) iii. Refer back to the previous question and assuming you believe the September spot price will be $0.70500 per 10 MXN. What speculative position would you enter? Justify your answer. (12 marks) QUESTION 3 (35 MARKS) S. H. Products, located in central England close to the Welsh border, is an old-line producer of herbal teas, seasonings, and medicines. Its products are marketed all over the United Kingdom and in many parts of continental Europe as well. S. H. generally invoices in British pound sterling when it sells to foreign customers in order to guard against adverse exchange rate changes. Nevertheless, the firm has just received an order from a large wholesaler in central France for 320,000 of its products, conditional upon delivery being made in three months' time and the order is invoiced in euros. S. H.'s controller, Edward Pauls, is concerned with whether the pound will appreciate versus the euro over the next three months, thus eliminating all or most of the profit when the euro receivable is paid. He thinks this is an unlikely possibility, but he decides to contact the firm's banker for suggestions about hedging the exchange rate exposure. Mr. Pauls learns from the banker that the current spot exchange rate for / is 1.4537, thus the invoice amount should be 465,184. Mr. Pauls also learns that the three-month forward rates for the pound and the euro versus the U.S. dollar are $1.8990/1.00 and $1.3154/1.00, respectively. The banker offers to set up a forward hedge for selling the euro receivable for pound sterling based on the / forward cross- exchange rate implicit in the forward rates against the dollar. Suppose S. H sells at a twenty percent markup. What would you do if you were Mr. Pauls? Construct the hedging framework for Mr. Pauls and advice the best solution for S. H. Products. (10 marks) b. Suppose that the current spot exchange rate is 1.50/ and the one-year forward exchange rate is 1.58/. The one-year interest rate is 6.0% in euros and 5.2% in pounds. You can borrow at most 1,000,000 or the equivalent pound amount, i.e., 666,667, at the current spot exchange rate. i. Show how you can realize a guaranteed profit from covered interest arbitrage. Assume that you are a euro-based investor. Also determine the size of the arbitrage profit. (10 marks) ii. Discuss how the interest rate parity may be restored as a result of the above transactions. (5 marks) iii. Suppose you are a pound-based investor. Show the covered arbitrage process and determine the pound profit amount (10 marks) END OF QUESTION PAPER Open interest 127,331 5.904 105,183 9.962 138,199 10.974 QUESTION 2 (30 MARKS) a. Below is a quotation for CME Group Currency Futures Contract Open High Low Settle Change Currency Futures Japanese Yen (CME) - V12,500,000; S per 100% June 1.0994 1.0994 1.0828 1.0849 -0.0114 September 1.0996 1.1008 1.0846 1.0866 -0.0144 Canadian Dollar (CME) - CAD100,000; S per CAD June 0.9482 0.9641 0.9457 0.9615 0.0094 September 0.9482 0.9636 0.9453 0.9610 0.0094 British Pound (CME) - 62,500; S per June 1.4646 1.4772 1.4554 1.4643 -0.0020 September 1.4655 1.4774 1.4557 1.4646 -0.0020 Swiss Franc (CME) - CHF125,000; S per CHF June 0.8644 0.8676 0.8621 0.8655 -0.0003 September 0.8686 0.8701 0.8646 0.8679 -0.0004 Australian Dollar (CME) - AUD100,000; S per AUD June 0.8295 0.8413 0.8265 0.8354 -0.0014 September 0.8213 0.8326 0.8180 0.8268 -0.0013 Mexican Peso (CME) - MXN500,000; S per 10MXN June 0.77075 0.78175 0.76850 0.78000 0.00700 September 0.76475 0.77400 0.76175 0.77275 0.00725 Euro (CME) - 125,000; S per June 1.2216 1.2276 1.2175 1.2240 -0.0018 September 1.2229 1.2288 1.2189 1.2253 -0.0018 Euro/British Pound (CME) - 125,000; per June 0.83300 0.83805 0.82800 0.83590 0.00010 September 0.83040 0.83855 0.83000 0.83665 0.00005 46,450 3.496 104,151 6,247 78,059 751 255,420 19,335 11,107 170 Euro/Japanese Yen (CME) - 125,000; per June 111.18 113.05 111.09 September 112.50 112.71 111.60 112.82 112.78 1.01 1.01 7,309 527 Euro/Swiss Franc (CME) - 125,000; CHF per June 1.7048 1.6860 1.6919 September 1.6875 -0.0017 -0.0015 626 3 i. Evaluate the face value of the open interests in for the month of June and September for Euro/Japanense yen futures contracts and Australian dollar futures contract. (6 marks) ii. In September, Mexican peso futures contract has a price of $0.7725 per 10MXN. You believe the spot price in September will be $0.83800 per 10MXN. What speculative position would you enter into to attempt to profit from your beliefs? Quantify your anticipated profits, assuming you take a position in three contracts. What is the size of your profit (loss) if the futures price is indeed an unbiased predictor of the future spot price and this price materializes? (12 marks) iii. Refer back to the previous question and assuming you believe the September spot price will be $0.70500 per 10 MXN. What speculative position would you enter? Justify your answer. (12 marks) QUESTION 3 (35 MARKS) S. H. Products, located in central England close to the Welsh border, is an old-line producer of herbal teas, seasonings, and medicines. Its products are marketed all over the United Kingdom and in many parts of continental Europe as well. S. H. generally invoices in British pound sterling when it sells to foreign customers in order to guard against adverse exchange rate changes. Nevertheless, the firm has just received an order from a large wholesaler in central France for 320,000 of its products, conditional upon delivery being made in three months' time and the order is invoiced in euros. S. H.'s controller, Edward Pauls, is concerned with whether the pound will appreciate versus the euro over the next three months, thus eliminating all or most of the profit when the euro receivable is paid. He thinks this is an unlikely possibility, but he decides to contact the firm's banker for suggestions about hedging the exchange rate exposure. Mr. Pauls learns from the banker that the current spot exchange rate for / is 1.4537, thus the invoice amount should be 465,184. Mr. Pauls also learns that the three-month forward rates for the pound and the euro versus the U.S. dollar are $1.8990/1.00 and $1.3154/1.00, respectively. The banker offers to set up a forward hedge for selling the euro receivable for pound sterling based on the / forward cross- exchange rate implicit in the forward rates against the dollar. Suppose S. H sells at a twenty percent markup. What would you do if you were Mr. Pauls? Construct the hedging framework for Mr. Pauls and advice the best solution for S. H. Products. (10 marks) b. Suppose that the current spot exchange rate is 1.50/ and the one-year forward exchange rate is 1.58/. The one-year interest rate is 6.0% in euros and 5.2% in pounds. You can borrow at most 1,000,000 or the equivalent pound amount, i.e., 666,667, at the current spot exchange rate. i. Show how you can realize a guaranteed profit from covered interest arbitrage. Assume that you are a euro-based investor. Also determine the size of the arbitrage profit. (10 marks) ii. Discuss how the interest rate parity may be restored as a result of the above transactions. (5 marks) iii. Suppose you are a pound-based investor. Show the covered arbitrage process and determine the pound profit amount (10 marks) END OF QUESTION PAPER
