Answers to End of Chapter 5s Questions

1. Because currency futures contracts are standardized into small amounts, they can be valuable for the speculator or small firm (a commercial banks forward contracts are more common for larger amounts). However, the standardized format of futures forces limited maturities and amounts. 11. rofit per unit on e!ercising the option " #$.%& remium paid per unit " #$.$' (et profit per unit " #$.&) (et profit for one option " *&,%+$ units , #$.&) " #+,*&%.+$ 12. remium received per unit " #$.$& -mount per unit received from selling .# " #$.)/ -mount per unit paid when purchasing .# " #$.0% (et profit per unit " 1#$.$+ (et rofit " +$,$$$ units , (1#$.$+) " 1#%,+$$ 15. 2se recent movements in the euro to forecast future movements. 3f the euro has been strengthening, purchase futures on euros. 3f the euro has been weakening, sell futures on euros. - strategys profitability can be determined by comparing the amount paid for each contract to the amount for which each contract was sold. 17. a. 4he 5ecember futures price would have decreased, because it reflects e!pectations of the future spot rate as of the settlement date. 3f the e!isting spot rate is #&.+&, the spot rate e!pected on the 5ecember futures settlement date is likely to be near #&.+& as well. b. 6ou would have sold futures at the e!isting futures price of #&.+7. 4hen as the spot rate of the pound declined, the futures price would decline and you could close out your futures position by purchasing a futures contract at a lower price. -lternatively, you could wait until the settlement date, purchase the pounds in the spot market, and fulfill the futures obligation by delivering pounds at the price of #&.+7 per pound. 18. 8peculators could purchase peso futures for #$.$7 per unit, and simultaneously sell pesos forward at #$.$7% per unit. 9hen the pesos are received (as a result of the futures position) on the settlement date, the speculators would sell the pesos to fulfill their forward contract obligation. 4his strategy results in a #$.$$% per unit profit. -s many speculators capitalize on the strategy described above, they would place upward pressure on futures prices and downward pressure on forward prices. 4hus, the difference between the forward contract price and futures price would be reduced or eliminated.

8 5'%$+: ;ultinational Business <inance

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ossible 8pot =ate of .anadian 5ollar on ?!piration 5ate #$.)/ $.)0 $.0$ $.0% $.0+ $.0) ossible 8pot =ate of .anadian 5ollar on ?!piration 5ate #$.)/ $.)7 $.0' $.0) $.07 $.7&

(et rofit (>oss) per 2nit to >82 .orporation if 8pot =ate @ccurs 1#$.$% $.$$ $.$% $.$' $.$) $.$7 (et rofit (>oss) per 2nit to -uburn .orporation if 8pot =ate @ccurs #$.$0 $.$+ $.$$ 1$.$% 1$.$% 1$.$%

20.

23. 4he team could purchase put options on pounds in order to lock in the amount at which it could convert the & million pounds to dollars. 4he e!piration date of the put option should correspond to the date in which the team would receive the & million pounds. 3f the deal is not approved, the team could let the put options e!pire. 3f the team waits three months, option prices will have changed by then. 3f the pound has depreciated over this threeAmonth period, put options with the same e!ercise price would command higher premiums. 4herefore, the team may wish to purchase put options immediately. 4he team could also consider selling futures contracts on pounds, but it would be obligated to e!change pounds for dollars in the future, even if the deal is not approved. 26. a. - forward hedge would be more appropriate, because it can lock in payment at #.+$ per unit with either method, but it does not have to pay a premium when using the forward rate. 3t will not benefit from the fle!ibility of the call option since it is convinced that the 8ingapore dollar will appreciate. b. ;ore, because the option premium increased due to more uncertainty

8 5'%$+: ;ultinational Business <inance