1. A speculator purchased a call option on Swiss francs at a strike price of $0.70 and for a premium of $0.06 per unit. At the time the option was exercised if the Swiss franc spot rate was $.75,

i. Calculate the net profit per unit to the speculator.

ii. What is the net profit for 1 contract of 62500 units?

iii. What should the spot price have to be if the option was exercised for the speculator to break even?

iv. What was the net profit per unit to the seller of this option?

2. A computer costs $1,300 in the United States.The same computer costs 1,100 euros in Europe.Assuming that purchasing power parity (PPP) strictly holds, what is the spot exchange rate between the dollar and the euro?

3. Assume that you purchased British pound call options for speculative purposes. Each option was purchased for a premium of $0.03 per pound with exercise price of $1.75 per pound. You plan to wait until the expiration date before considering whether to exercise the options. In this table, fill in the net profit (or loss) per unit to you based on listed possible spot rates of the pound that may exist on the expiration date.

Possible spot rate of the Net profit (or loss) per unit pound on expiration date should spot rate occur

$1.76 x

$1.78 x

$1.80 x

$1.82 x

$1.85 x

$1.87 x

4. The table below shows the activities of a speculator in currency call options. Fill in the last column marked X

Spot rate at time of purchase of call Strike price of call option Premium paid on option Spot rate when option was exercised, if at all Net profit per unit

$1.47 $1.50 $.0175 $1.54 X

1.87 1.850 .0530 1.77 X

1.82 1.825 .0254 1.74 X

1.61 1.600 .0256 1.68 X

5. On April 15, a US firm anticipates that it will need A$500,000 in June to pay for its order of supplies from an Australian supplier. Consequently, it purchases a futures contract for this amount (for June 18 settlement). On April 15, this contract was priced at $0.63 per A$. On May 7, the American firm realizes that it will not need to order the supplies any more. It consequently sells the contract to offset the contract it purchased in April (for June settlement). At this time the futures contract is priced at $0.60 per A$. Show how much profit or loss was made on this futures transaction by the American company.

6. A put option on euros is available with a strike price of $1.29. This is purchased by a speculator for a premium of $0.03. If the euro spot rate on the day of expiration is $1.24, indicate if the speculator should exercise the option on this date or let it expire. What is the net profit per unit to the speculator? What is the net profit per unit to the seller of this put option?

7. A company has sold euro put options at a premium of $0.01 per unit, and with an exercise price of $1.16 per unit. Assume that the put options are exercised at the levels indicated in the table below. Determine the net profit (or loss) per unit to the company in each case.

Possible value of euro Net profit (loss) if value occurs

$1.12

$1.13

$1.14

$1.15

$1.16

8. Randy purchased a call option on British pounds for 0.02 euros per unit. The strike price was 1.45 euros, and the spot rate at the time the option was exercised was 1.46 euros. Assume there are 31250 units in a British pound option. What was Randy's net profit on the option?

9. Mike sold a call option on Canadian dollars for 0.01 per unit. The strike price was 0.42, and the spot rate at the time of the option was exercised 0.46. Assume Mike did not obtain Canadian dollars until the option was exercised. Also, assume that there are 50,000 units in a Canadian dollar option. What was Mike's net profit or loss on the call option?

10. A Ghanaian farmer living the State of Iowa in the United States of America uses the futures market a lot for sale of his corn harvest. Assume this farmer expects to harvest 100,000 bushels of corn next September and he is concerned about the possibility of price fluctuations between now and September. The September futures put options with a strike price of $2.50 per bushel costs $0.20 per bushel. Assuming this farmer hedges using put options, calculate his revenue for corn price per bushel of (i) $2.00 (ii) $2.50 and (iii) $3.00

Answer rating: 100% (QA)

Answer Question 1 To solve this problem well use the following formulas i Net Profit per Unit for the Speculator Spot Price at Exercise Strike Price Premium Paid ii Net Profit for 1 Contract of 62500 ... View the full answer