Derivative
Derivative
Derivative
6 Peleh's Puts
Peleh writes a put option on the Australian dollar (A$) with a strike price of $0.9100/A$ at a premium of $0.0245/A$ and with an expiration date six months from now. The
option is for A$100,000. What is Peleh’s profit or loss at maturity if the ending spot rates are $0.8500/A$, $0.8800/A$, $0.9100/A$, $0.9400/A$, and $0.9700/A$?
a) b) c) d) e)
Assumptions Values Values Values Values Values
Notional principal (AUD) 100,000 100,000 100,000 100,000 100,000
Maturity (days) 180 180 180 180 180
Strike price (USD/AUD) $0.910000 $0.910000 $0.910000 $0.910000 $0.910000
Premium (USD/AUD) $0.024500 $0.024500 $0.024500 $0.024500 $0.024500
Amber McClain, the currency speculator we met earlier in the chapter,sells eight June futures contracts for
500,000 pesos at the closing price quoted in Exhibit 7.1.
a. What is the value of her position at maturity if the ending spot rate is $0.12000/Ps?
b. What is the value of her position at maturity if the ending spot rate is $0.09800/Ps?
c. What is the value of her position at maturity if the ending spot rate is $0.11000/Ps?
a. b. c.
Assumptions Values Values Values
Number of pesos per futures contract 500,000 500,000 500,000
Number of contracts 8.00 8.00 8.00
Buy or sell the peso futures? Sell Sell Sell
Interpretation
Amber buys at the spot price and sells at the futures price.
If the futures price is greater than the ending spot price, she makes a profit.
Problem 7.3 Cece Cao in Jakarta
Cece Cao trades currencies for Sumatra Funds in Jakarta. She focuses nearly all of her time and attention on the U.S.
dollar/Singapore dollar ($/S$) cross-rate. The current spot rate is $0.6000/S$. After considerable study, she has concluded
that the Singapore dollar will appreciate versus the U.S. dollar in the coming 90 days, probably to about $0.7000/S$. She
has the following options on the Singapore dollar to choose from:
Assumptions Values
Current spot rate (US$/Singapore dollar) $0.6000
Days to maturity 90
Expected spot rate in 90 days (US$/Singapore dollar) $0.7000
Since Cece expects the Singapore dollar to appreciate versus the US dollar, she should buy a call on Singapore dollars.
This gives her the right to BUY Singapore dollars at a future date at $0.65 each, and then immediately resell them in the
open market at $0.70 each for a profit. (If her expectation of the future spot rate proves correct.)
c. What is Cece's gross profit and net profit (including premium) if the ending spot rate is $0.70/S$?
d. What is Cece's gross profit and net profit (including premium) if the ending spot rate is $0.80/S$?
Christoph Hoffeman trades currency for Kapinsky Capital of Geneva. Christoph has $10 million to begin with, and he must
state all profits at the end of any speculation in U.S. dollars. The spot rate on the euro is $1.3358/€, while the 30-day forward
rate is $1.3350/€.
a. If Christoph believes the euro will continue to rise in value against the U.S. dollar, so that he expects the spot rate to be
$1.3600/€ at the end of 30 days, what should he do?
b. If Christoph believes the euro will depreciate in value against the U.S. dollar, so that he expects the spot rate to be
$1.2800/€ at the end of 30 days, what should he do?
a. b.
Assumptions Values Values
Initial investment (funds available) $10,000,000 $10,000,000
Current spot rate (US$/€) $1.3358 $1.3358
30-day forward rate (US$/€) $1.3350 $1.3350
Expected spot rate in 30 days (US$/€) $1.3600 $1.2800
One of the more interesting dimensions of speculating in the forward market, is that if the speculator has access to the forward
market (bank lines or relationships when working on behalf of an established firm), many forward speculation strategies
require no actual cash flow position up-front. In this case, Christoph believes the dollar will be trading at $1.36/€ in the open
market at the end of 30 days, but he has the ability to buy or sell dollars at a forward rate of $1.3350/€. He should therefore
buy euros forward 30 days (requires no actual cash flow up-front), and at the end of 30 days take delivery of those euros and
sell in the spot market at the higher dollar rate for profit.
Stefan had sold these euros forward at the start of the 30 day period.
30 day forward rate (US$/€) $1.3350
US$ proceeds (euros sold forward into US$) $10,429,687.50
Profit in US$ $429,687.50
Problem 7.5 Kapinsky Capital Geneva (B)
Christoph Hoffeman of Kapinsky Capital Geneva now believes the Swiss franc will appreciate versus the U.S.
dollar in the coming three-month period. He has $100,000 to invest. The current spot rate is $0.5820/SF, the
three-month forward rate is $0.5640/SF, and he expects the spot rates to reach $0.6250/SF in three months.
a. Calculate Christoph's expected profit assuming a pure spot market speculation strategy.
b. Calculate Christoph's expected profit assuming he buys or sells SF three months forward.
a. b.
Assumptions Values Values
Initial investment (funds available) $100,000 $100,000
Current spot rate (US$/Swiss franc) $0.5820 $0.5820
Six-month forward rate (US$/Swiss franc) $0.5640 $0.5640
Expected spot rate in six months (US$/Swiss franc) $0.6250 $0.6250
Peleh writes a put option on the Australian dollar (A$) with a strike price of $0.9100/A$ at a premium of $0.0245/A$ and with an expiration date six months from now. The
option is for A$100,000. What is Peleh’s profit or loss at maturity if the ending spot rates are $0.8500/A$, $0.8800/A$, $0.9100/A$, $0.9400/A$, and $0.9700/A$?
a) b) c) d) e)
Assumptions Values Values Values Values Values
Notional principal (AUD) 100,000 100,000 100,000 100,000 100,000
Maturity (days) 180 180 180 180 180
Strike price (USD/AUD) $0.910000 $0.910000 $0.910000 $0.910000 $0.910000
Premium (USD/AUD) $0.024500 $0.024500 $0.024500 $0.024500 $0.024500
Assumptions Values
Quantum of loan 10,000,000
Tenure of loan (weeks) 18
Cachita Haynes works as a currency speculator for Vatic Capital of Los Angeles. Her latest speculative
position is to profit from her expectation that the U.S. dollar will rise significantly against the Japanese yen.
The current spot rate is ¥120.00/$. She must choose between the following 90-day options on the Japanese
yen:
Assumptions Values
Current spot rate (Japanese yen/US$) 120.00
in US$/yen $0.00833
Maturity of option (days) 90
Expected ending spot rate in 90 days (yen/$) 140.00
in US$/yen $0.00714
b. What is Cachita's break even price on her option of choice in part a)?
Cachita buys a put on yen. Pays premium today.
In 90 days, exercises the put, receiving US$.
in yen/$
Strike price $0.00800 125.00
Less premium -$0.00003
Breakeven $0.00797 125.47
c. What is Cachita's gross profit and net profit if the end spot rate is 140 yen/$?
Consider an American call option on New Zealand dollars (NZ$) with a strike price of $0.8100/NZ$ traded at a premium of $0.0192 per NZ$ and with an expiration date three months from now.
The option is for NZ$100,000.
a. Suppose that you have bought such a call option. Plot your profit or loss on a graph should you exercise before maturity at a time when the NZ$ is traded spot at between $0.7000/NZ$ and
$0.9200/NZ$. Find the break-even exchange rate.
b. Repeat (a) if you have sold such a call option.
Assumptions Values
Notional principal (NZD) NZD 100,000
Strike price (USD/NZD) USD 0.8100
Premium (USD/NZD) USD 0.019200
8000
6000
4000
2000
0
0.7 0.75 0.8 0.85 0.9
-2000
0
0.7 0.75 0.8 0.85 0.9
-2000
-4000
-6000
-8000
-10000
Problem 7.10 Arthur Doyle at Baker Street
Arthur Doyle is a currency trader for Baker Street, a private investment house in London. Baker Street’s clients are a collection of
wealthy private investors who, with a minimum stake of £250,000 each, wish to speculate on the movement of currencies. The
investors expect annual returns in excess of 25%. Although officed in London, all accounts and expectations are based in U.S. dollars.
Arthur is convinced that the British pound will slide significantly -- possibly to $1.3200/£ -- in the coming 30 to 60 days. The
current spot rate is $1.4260/£. Arthur wishes to buy a put on pounds which will yield the 25% return expected by his investors. Which
of the following put options would you recommend he purchase. Prove your choice is the preferable combination of strike price,
maturity, and up-front premium expense.
Assumptions Values
Current spot rate (US$/£) $1.4260
Expected endings spot rate in 30 to 60 days (US$/£) $1.3200
Potential investment principal per person (£) £250,000.00
1. Because his expectation is for "30 to 60 days" he should confine his choices to the 60 day options to be sure and capture
the timing of the exchange rate change. (We have no explicit idea of why he believes this specific timing.)
Assumptions Values
Current spot rate (US$/Canadian dollar) $0.6750
Days to maturity 90
Since Giri expects the Canadian dollar to appreciate versus the US dollar, he should buy a call on Canadian dollars.
c) What is Giri's gross profit and net profit (including premium) if he ending spot rate is $0.7600/C$?
d) What is Giri's gross profit and net profit (including premium) if the ending spot rate is $0.8250/C$?
When the volatility is increased to 12.000% from 10.500%, the premium on the call option on euros rises to $0.0412/€, or 5.15%.
Problem 7.13 U.S. Dollar/Japanese Yen
A Japanese firm wishing to sell U.S. dollars would need to purchase a put on dollars. The put option premium listed above is JPY3.06/$.
A European-based firm like Legrand (France) would need to purchase a put option on the Japanese yen. The company wishes a strike rate of 0.0072
euro for each yen sold (the strike rate) and a 90-day maturity. Note that the "Time" must be entered as the fraction of a 365 day year, in this case, 90/365
= 0.247.
Call option premiums for a U.S.-based firm buying call options on the British pound:
The maturity doubled while the option premium rose only about 4%.
Problem 7.16 Euro/British Pound
When the euro's interest rate rises from 2.072% to 4.000%, the call option premium on British pounds rises: