Problem # $2(15$ Pts$.)$

Adam is a speculator. He has $$9$ million to start with and he must state all profits at the end of any speculation in U$.$S$.$ dollars. The spot rate on the euro is $$1\mathrm{.}3358/,$ while the $30-$day forward rate is $51\mathrm{.}3350/.$

a$.$ If Adam believes the euro will appreciate against the U$.$S$.$ dollar, so that he expects the spot rate to be $$1\mathrm{.}3600/$ at the end of $30$ days, what should he do$?$

b$.$ If Adam believes the euro will depreciate against the U$.$S$,$ dollar, so that he expects the spot rate to be $$12800/$ at the end of $30$ days, what should he do$?$

Problem # $3(20$ Pts$.)$

MNCs use risk management techniques to eliminate transaction exposure including forward hedges, money market hedges, and option hedges. Draw one diagram to show the possible outcomes of these hedging alternatives for a foreign currency payables contract. In your diagram, be sure to label the X and Y$-$axis, the put option strike price, and show the possible results for a money market hedge, a forward hedge, a put option hedge, and an uncovered position.

$($Note: Assume the Call option strike price is $$1\mathrm{.}50/,$the price of the option is $$0\mathrm{.}04$ the forward rate is $$1\mathrm{.}52/$ and the current spot rate, at to$,$ is $$1\mathrm{.}48/.$Further, have the X axis for the ending spot exchang rate and the y axis for receivables in $$/.$For simplicity, you can assume you will pay one $$ in the future