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What is matts breakeven price on the option

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Reference no: EM13177940

Q1 Singh Designer Corporation is expecting to receive 2,000,000 Euros in 3 months. The treasury department provides the following information. You are required to furnish a recommendation as to whether Singh Corp. should:

a) Remain Unhedged

b) Hedge with Forwards

c) Set up a money market hedge

d) Hedge with options

Make sure you support your recommendation with potential payoffs attributable to each possible alternative described above.

Transaction Exposure Example

 

Transaction amount

€ 2,000,000

Spot rate $/Euro

1.754

90-day forward

1.765

Cost of capital

14%

Euro 3 month borrow

0.02

Euro 3 month investment

0.02

US3 month borrow

0.03

US 3 month investment

0.015

Expected spot

1.78

Options

 

Maturity

90 days

Strike price: X

1.65

Premium

1.25%

Q2

Period

 

Days Forward

 

Bid Rate

 

Ask Rate

spot

 

 

 

 114.23

 

 114.27

1 month

 

30

 

 113.82

 

 113.87

6 months

 

180

 

 112.05

 

 112.11

24 months

 

720

 

 106.83

 

 106.98

a. Use the following spot and forward bid-ask rates for the Japanese yen/U.S. dollar (¥/$) exchange rate to answer the following questions:

1) Calculate the mid-rates from the bid-ask rate quotes.

2) Calculate the forward premium on the different maturities using the mid-rates from part a).

b. You have SF 10,000,000. Given the information below on three different banks offered currency rates, can you make riskless profit on the Swiss francs by triangular arbitrage? Show your steps and the amount of profit.

Given Parameter

Values

Beginning funds in Swiss francs (SF)

 10,000,000.00

Bank of Japan (yen/$)

 120.00

Swiss Banking Corp (SF/$)

 1.6000

Royal Bank (yen/SF)

 80.00

Q3 Jason Smith is a currency trader.  He has $10 million (or its Swiss franc equivalent) for a short-term money market investment. He faces the following quotes:                           

Arbitrage funds available                                            $10,000,000

Spot exchange rate (SFr./$)                                        1.1050

3-month forward rate (SFr./$)                                                1.0575

U.S. dollar 3-month interest rate                                5.800%

Swiss franc3-month interest rate                                4.100%                       

Make a recommendation if he should invest in U.S. dollars for three months, or make a covered interest arbitrage investment in the Swiss franc. Show the steps and arbitrage profits payoffs.

Q4

Matt works for Currency trader. He expects that the Australian dollar (AUD) will appreciate versus the U.S. dollar over the coming 90 days. The current spot rate is $0.5750/AUD. Matthas the following options available based on the Australian dollar:

Current spot rate (US$/Aus dollar)

$0.5750

 

Days to maturity

90

 

 

 

 

Option choices on the Aus dollar:

Call option

Put option

    Strike price (US$/Aus dollar)

$0.6000

$0.6000

    Premium (US$/Aus dollar)

$0.0149

$0.0004

a) Which option should Matt buy?

b) What is Matt's breakeven price on the option purchased in part a)?

c) What is Matt's gross profit and net profit (including premium) if the ending spot rate is $0.6600/AUD?

d) What is Matt's payoff if the spot rate is $.5550/AUD.

Reference no: EM13177940

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