Show the workings.
4. Assume that the interest rates are 21 percent and 10 percent p.a. in Thailand and Switzerland, respectively. Consider a call and a put at X = THB/CHF 21. (a) What is the lower bound for European-style options with lives equal to T-t = one year, six months, three months, one month, when ST = 18, 20, 22, 24, respectively? (b) If ST = 20, re,T = 0.21, ry = 0.10, a one-year call with X = THE/CHF 20 priced at 1 is undervalued. Show that, with this call price, we can buy a synthetic put at a negative price.1. The Danish wool trader in Section 6.5.3 faces potential competition from Australian producers. (a) Graphically analyze the value of the trader's inventory as a function of the future spot price. (b) Explain why a put on AUD eliminates the dependence of the inventory's value on the exchange rate for DKK/AUD.2. The UK firm, Egress Import-Export, Lid, sells its goods at home for Py when the value of the EUR is low. As the value of the EUR increases, it starts exporting its goods at the foreign price (net of costs) P., netting it P, X ST. (a) Illustrate the value of Egress's goods as a function of the future spot price. (b) How can Egress eliminate its exposure to the EUR (that is, sell its potential EUR profits)?3. The Thailand Plettery Steel Company has a debt of NZD 100,000, which is repayable in twelve months. Plettery's controller Jane Due is having trouble sleeping at night knowing that the debt is unhedged. The current THE/NZD exchange rate is 20, and p.a. interest rates are 21 percent on THE and 10percent on NZD. Jane is considering a forward hedge (at For = 20 x 1.21/1.10 =22), but a friend tells her that he recently bought a call on NZD 100,000 with X = 20,Use the following table's data, excerpted from The Wall Street Journal of Tuesday, March 22, 1994, to answer questions 1 to 4. Option& Strike Call-Last Put-Last underlying price Apr May Jun Apr May Jun 31,250 British Pounds-cents per unit. 148.61 147 1/2 0.95 1.80 r 148.61 150 1.60 1.85 148.61 155 0.07 1 57 r r 148.61 157 1/2 0.03 62,500 New Zealand Dollars-cents per unit. 59.04 58 1.08 0.35 0.65 0.90 59.04 58 1/2 0.79 1.35 0.46 1.12 59.04 59 0.51 0.80 1.02 0.80 1.10 1.40 59.04 59 1/2 0.35 F 6,250,000 Japanese Yen-100ths of a cent per unit. 94.18 93 1.2 94.18 93 1/2 0.72 r 94.18 1.41 1.68 94.18 94 1/2 0.81 1.12 r-not traded. no option offered. Last is premium(purchase price). 1. What is the last quote for an April call option on GBP with a strike price of 155? A. 0.07. 2. What is the last quote for a May put option on NZD with a strike price of 58? A. 0.65. 3. What is the last quote for a June put option on joy with a strike price of 93 1/2? A. The option was not traded on Monday, March 21. 4. For the options below, what is the intrinsic value? Is the intrinsic value greater than, less than, or equal to the option premium? (a) June call on GBP with a strike price of 150. 15:01 on 8 March 2009 P. Sercu, K. U.Leuven SB&E 52 CHAPTER 8. CURRENCY OPTIONS (1): CONCEPTS AND USES (b) May put on Ger with a strike price of 147 1/2. (c) April call on NZD with a strike price of 59. (d) June put on NZD with a strike price of 59. (e) May call on joy with a strike price of 93. (f) May put on joy with a strike price of 94.5. You hold a foreign exchange asset that you have hedged with a put. Show graphically how the put limits the potential losses created by low exchange rates, without eliminating the potential gains from high rates. 6. You have covered a foreign exchange debtusing a call. Show graphically how the call limits the potential losses created by high exchange rates, without eliminating the potential gains from low rates.Quiz Questions 1. How does a fixed-for-fixed currency swap differ from a spot contract com- bined with a forward contract in the opposite direction? 2. Describe some predecessors to the currency swap, and discuss the differences with the modern swap contract. 3. What are the reasons why swaps may be useful for companies who want to borrow? 4. How are swaps valued in general? How does one value the floating-rate leg (if any), and why