Question 1

An Australian investor holds a one month short forward position on USD. The contract calls for the investor to sell USD 2 million in one months at a delivery price of $1.61 per USD. The current forward price for delivery in one month is F= $1.5850 per USD. Suppose the one month rate of interest is 6%. What is the value of the investors position? (3 marks)

Question 2

A speculator can choose between buying 100 shares of a stock for $40 per share and buying 1000 European call options on the stock with a strike price of $45 for $4 per option. For second alternative to give a better outcome at the option maturity, the stock price must be above 50 or below 50 explain?

(3 marks)

Question 3

Explain in detail the difference between the following terms: (4 marks)

(a) Payoff to a FRA.

(b) Price of a FRA.

(c) Value of a FRA.