Reference no: EM133061736

1. What is the major difference in the obligation of one with a long position in a futures (or forward) contract in comparison to an options contract?

2. What are the advantages and disadvantages to a U.S. corporation that uses currency options on euros rather than a forward contract on euros to hedge its exposure in euros? Explain why an MNC use forward contracts to hedge committed transactions and use currency options to hedge contracts that are anticipated but not committed. Why might forward contracts be advantageous for committed transactions, and currency options be advantageous for anticipated transactions?

3. Differentiate between a currency call option and a currency put option.

4. What is meant by the terminology that an option is in-, at-, or out-of-the-money? 

5. When would a Thai firm consider purchasing a call option on euros for hedging? When would a Thai firm consider purchasing a put option on euros for hedging?

6. When should a speculator purchase a call option on Australian dollars? When should a speculator purchase a put option on Australian dollars?

7. Somi purchased a call option on British pounds for $.02 per unit. The strike price was $1.45 and the spot rate at the time the option was exercised was $1.46. Assume there are 31,250 units in a British pound option. What was Somi's net profit on this option?

8. Jenny purchased a put option on British pounds for $.04 per unit. The strike price was $1.80 and the spot rate at the time the pound option was exercised was $1.5

9. Assume there are 31,250 units in a British pound option. What was Jenny's net profit on the option?

10. Speculating with Currency Options. The spot rate of the New Zealand dollar is $.77. A call option on New Zealand dollars with a one-year expiration date has an exercise price of $.78 and a premium of $.04. A put option on New Zealand dollars at the money with a one-year expiration date has a premium of $.03. You expect that the New Zealand dollar's spot rate will decline over time and will be $.71 in one year. 

• Today, Dawn purchased call options on New Zealand dollars with a one-year expiration date. Estimate the profit or loss per unit at the end of one year. [Assume that the options would be exercised on the expiration date or not at all.] 
• Today, Mark sold put options on New Zealand dollars at the money with a one-year expiration date. Estimate the profit or loss per unit for Mark at the end of one year. [Assume that the options would be exercised on the expiration date or not at all.]