QUESTION 7

1. Frank is an option speculator. He anticipates the Swedish krona will appreciate from its current level of $.19 to $.21. Currently, the krona call options are available with an exercise price of $.28 and a premium of $.06. Should Frank attempt to buy this option? If the future spot rate of the Swedish krona is indeed $.39, what is his profit or loss per unit?

   	a.	yes; $0.05
   	b.	no; $0.07
   	c.	yes; $0.07
   	d.	yes; $0.08

1.5 points

QUESTION 8

1. Crown Co. is expecting to receive 100,000 British pounds in one year. Crown expects the spot rate of the British pound to be $1.49 in a year, so it decides to avoid exchange rate risk by hedging its receivables. The spot rate of the pound is quoted at $1.51. The strike price of put and call options are $1.54 and $1.53, respectively. The premium on both options is $.03. The one-year forward rate exhibits a 2.65 percent premium. Assume there are no transaction costs. What is the best possible hedging strategy and how many U.S. dollars Crown Co. will receive under this strategy?

   	a.	Sell pounds forward and receive $155,000.
   	b.	Sell a put option and receive $157,000.
   	c.	Buy a put option and receive $150,000.
   	d.	Sell a call option and receive $156,000.

1.5 points

QUESTION 9

1. Assume the bid rate of a New Zealand dollar is $.33 while the ask rate is $.335 at Bank X. Assume the bid rate of the New Zealand dollar is $.32 while the ask rate is $.325 at Bank Y. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?

   	a.	$15,625
   	b.	$22,136
   	c.	$15,385
   	d.	$31,250