Problems during International Finance

Part 6. Sallie Schnudel trades currencies for Keystone Funds in Jakarta. She focuses nearly all of her time and attention on the U.S. dollar/Singapore dollar ($/SS) cross-rate. The current spot rate is $0.6000/SS. After considerable study, she has concluded that the Singapore dollar will appreciate versus the U.S. dollar in the coming 90 days, probably to about 80.7000/S$. She has the following options on the Singapore dollar to choose from: Option Strike Price Premium Put on Sing S $0.6500/SS S0.00003/SS Call on Sing S $0.6500/SS S0.00046/SS a. Should Sallie buy a put on Singapore dollars or a call on Singapore dollars? b. What is Sallie's breakeven price on the option purchased in part (a)? c. Using your answer from part (a), what is Sallie's gross profit and net profit (including premium) if the spot rate at the end of 90 days is indeed $0.7000/SS? d. Using your answer from part (a), what is Sallie's gross profit and net profit (including premium) if the spot rate at the end of 90 days is $0.8000/S$? Part 7. Suppose that you are expecting to receive 100 million euro in three months and you want to hedge against the exchange rate risks when you convert euro into dollar later. In the currency options market, two types of 90-day options are available in the table). Assume that one unit of option is 100 mil euro, Euro option Strike price Premium Put (right to sell euro) 1.1 $/euro 0.05 $/euro Call (right to buy euro) 1.12 S/euro 0.05 S/euro (1) Which option would you use to hedge against the exchange risks? How does your revenue at maturity depend on the future spot rate (use graph with the amount of US dollar received when you use this option on Y axis and $/euro exchange rate on X-axis). (2) The use of options has a disadvantage of having to pay premium now. However, by combining buying and selling of call and put options, you can hedge without incurring premium payment now (option collar). Explain how you can use option collar for the transaction in question (1). Draw graphs as in (1) ---END