QUESTION 2

a) Lionel Messi and his Barcelona football team decided to play a friendship match in the

Manchester, UK next year. It has been promised that the British government will pay all

expenses incurred and pay the team 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

World Football League must approve the deal, and approval (or disapproval) will not occur

for four months. How can Messi hedge its position? What is there to lose by waiting four

months to see if the friendship match is approved before hedging?

[ 2 marks]

b) Gilbert Corp. sold a put option on 200,000 euros with an expiration date of one year, one

year ago. He earned a premium on the put option of $0.08 per unit; the exercise price was

$1.62. Assume that one year ago, the spot rate of the euro was $1.50, the one-year forward

rate exhibited a discount of 4%, and the one-year futures price was the same as the one-

year forward rate. From one year ago to today, the euro depreciated against the dollar by

7%. Today the put option will be exercised (if it is feasible for the buyer to do so).

i) Calculate the total dollar amount of his profit or loss from his position in the put

option.

[3 marks]

ii) Assuming now that instead of taking a position in the put option one year ago, he sold

a futures contract on 200,000 euros with a settlement date of one year. Determine the

total dollar amount of his profit or loss.