NEED ASSIGNMENT HELP! COMMERCE 3FC3

3. On the day the Minister of Finance announced independence for the Bank of Taron along with a

boost in the base lending rate of one-quarter of a percentage point, the Taron stock market rose

1.4%, and Taron government bonds rose about 2.1%. The Tarony, Taron's currency, rose to

$1.7053 from $1.6211 and to DM2.9565 from DM2.8010. (20 marks)

a. Why did the Taron stock and bond markets react positively to the news?

b. Why did the Tarony appreciate on the news?

c. What was the Tarony's percentage appreciation against the U.S. dollar? Against the DM?

d. What was the percentage in the US dollar and DM?

6. In 2015 and 2016, the banks in country Quarto borrowed abroad at relatively low interest rates to

fund domestic lending. Runaway domestic inflation drove Quarto's domestic interest rates up

enabling the banks to earn high profits. At the same time, Quarto's central bank began intervening

in the foreign exchange market to maintain the value of the country's currency. Comment on the

Quarto banks' funding strategy. (5 marks)

9. Biogen expects to receive royalty payments totaling GBP()1.25 million next month. It is interested

in protecting these receipts against a drop in the value of GBP against the USD($). It can sell

30-day GBP futures at a price of US$1.6513 per GBP or it can buy GBP put options with a strike

price of $1.6612 at a premium of $0.02 per GBP. The spot price of the GBP is currently

US$1.6560, and the GBP is expected to trade in the range of $1.6250 to $1.7010. Biogen's

treasurer believes that the most likely price of the pound in 30 days will be $1.6400.

a. How many futures contracts will Biogen need to protect its receipts? How many options

contracts? (5 marks)

b. Diagram Biogen's profit and loss associated with the put option position and the futures

position within its range of expected exchange rates. Ignore transaction costs and margins.

(20 marks)

c. Calculate what Biogen would gain or lose on the option and futures positions within the range

of expected future exchange rates and if the pound settled at its most likely value. (5 marks)

d. What is Biogen's break-even future spot price on the option contract? On the futures contract?

(5 marks)

e. Calculate and diagram the corresponding profit and loss and break-even positions on the

futures and options contracts for those who took the other side of these contracts. (5 marks)