Practice problems for Module $2$

Currency speculation: you are given following information

Lending rate for $ is $8\mathrm{.}0\%$ and for peso is $8\mathrm{.}5\%$

Borrowing rate for $ is $8\mathrm{.}3\%$ and for peso is $8\mathrm{.}7\%$

Peso tends to appreciate against US$ from $$\mathrm{.}15$ to $$\mathrm{.}17$ in $30$ days

Your borrowing capacity is $$10$ million or $70$ million pesos.

a$.$ What is the interest rate on your loan?

b$.$ After currency conversion, how much should be deposited or lent?

c$.$ After $30$ days, how much is the expected cash inflow?

d$.$ After $30$ days, how much is the expected cash outflow?

e$.$ After $30$ days, how much is the expected profit?

Premium paid, P $,$ to get the call is $$0\mathrm{.}02$ per unit, Strike price, $x,$ is $$1\mathrm{.}45$; Spot price, $S,$ is $$1\mathrm{.}46$ when

the call is exercised; the size of the call is $31,250$ units. What is the net profit for the buyer of call

option?

Premium paid, $P,$ to get the put is $$0\mathrm{.}04$ per unit, Strike price, $x,$ is $$1\mathrm{.}80$; Spot price, $S,$ is $$1\mathrm{.}59$ when

the put is exercised; the size of the put is $31,250$ units. What is the net profit for the buyer of put

option?

Premium received from sale of the call is $$0\mathrm{.}01,x=$$$0\mathrm{.}76,S=$$$$0\mathrm{.}82.$ The size of the call is $50,000$

units. What is the net profit for the seller of call option?

Premium received from sale of the put is $$0\mathrm{.}03,x=$$$0\mathrm{.}75,S=$$$$0\mathrm{.}72.$ The size of the put is $50,000$

units. What is the net profit for the seller of put option?

See lecture notes for solutions to all practice problems.