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    Quantitative Questions .: 1 The Spot Rate of The New Zealand Dollar Is $.78. A Call Option On New Zealand Dollars With A

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    Mahi
    Dawn purchased call options on New Zealand dollars with a 1-year expiration date when the spot rate was $.78 and the exercise price was $.79. At the end of the year, if the spot rate declines to $.72 as expected, Dawn will earn a profit of $.04 per unit since she can exercise the option to buy at $.79 and immediately sell at the higher spot rate of $.72. Mark sold put options on New Zealand dollars at the money with a 1-year expiration date when the spot rate was $.78. At the end of the year, if the spot rate declines to $.72 as expected, Mark will have to buy dollars at $.78 from the option holder but can immediately sell them

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    Quantitative Questions .: 1 The Spot Rate of The New Zealand Dollar Is $.78. A Call Option On New Zealand Dollars With A

    Uploaded by

    Mahi
    114 views2 pages
    Dawn purchased call options on New Zealand dollars with a 1-year expiration date when the spot rate was $.78 and the exercise price was $.79. At the end of the year, if the spot rate declines to $.72 as expected, Dawn will earn a profit of $.04 per unit since she can exercise the option to buy at $.79 and immediately sell at the higher spot rate of $.72. Mark sold put options on New Zealand dollars at the money with a 1-year expiration date when the spot rate was $.78. At the end of the year, if the spot rate declines to $.72 as expected, Mark will have to buy dollars at $.78 from the option holder but can immediately sell them

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    Dawn purchased call options on New Zealand dollars with a 1-year expiration date when the spot rate was $.78 and the exercise price was $.79. At the end of the year, if the spot rate declines to $.72 as expected, Dawn will earn a profit of $.04 per unit since she can exercise the option to buy at $.79 and immediately sell at the higher spot rate of $.72. Mark sold put options on New Zealand dollars at the money with a 1-year expiration date when the spot rate was $.78. At the end of the year, if the spot rate declines to $.72 as expected, Mark will have to buy dollars at $.78 from the option holder but can immediately sell them

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    114 views2 pages

    Quantitative Questions .: 1 The Spot Rate of The New Zealand Dollar Is $.78. A Call Option On New Zealand Dollars With A

    Uploaded by

    Mahi
    Dawn purchased call options on New Zealand dollars with a 1-year expiration date when the spot rate was $.78 and the exercise price was $.79. At the end of the year, if the spot rate declines to $.72 as expected, Dawn will earn a profit of $.04 per unit since she can exercise the option to buy at $.79 and immediately sell at the higher spot rate of $.72. Mark sold put options on New Zealand dollars at the money with a 1-year expiration date when the spot rate was $.78. At the end of the year, if the spot rate declines to $.72 as expected, Mark will have to buy dollars at $.78 from the option holder but can immediately sell them

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
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    Quantitative questions

    1. The spot rate of the New Zealand dollar is $.78. A call option on New Zealand dollars with a
    1-year expiration date has an exercise price of $.79 and a premium of $.04. A put option on New
    Zealand dollars at the money with a 1-year expiration date has a premium of $.04. You expect
    that the New Zealand dollar’s spot rate will decline over time and will be $.72 in 1 year.

    a. Today, Dawn purchased call options on New Zealand dollars with a 1-year expiration date.
    Estimate the profit or loss per unit at the end of 1 year. [Assume that the options would be
    exercised on the expiration date or not at all.] (3%)

    b. Today, Mark sold put options on New Zealand dollars at the money with a 1-year expiration
    date. Estimate the profit or loss per unit for Mark at the end of 1 year. [Assume that the options
    would be exercised on the expiration date or not at all.] (3%)

    2. You go to a bank and are given these quotes:

    You can buy a euro for 14 pesos.


    The bank will pay you 15 pesos for a euro.

    You can buy a U.S. dollar for .1 euros.


    The bank will pay you .11 euros for a U.S. dollar.

    You can buy a U.S. dollar for 11 pesos.


    The bank will pay you 10 pesos for a U.S. dollar.

    You have $5,000. Can you use triangular arbitrage to generate a profit? If so, explain the order of
    the transactions that you would execute and the profit that you would earn. If you cannot earn a
    profit from triangular arbitrage, explain why. (5%)

    3. As treasurer of Tempe Corp., you are confronted with the following problem. Assume the 1-
    year forward rate of the British pound is $1.59. You plan to receive 1 million pounds in 1 year. A
    1-year put option is available. It has an exercise price of $1.61. The spot rate as of today is $1.62,
    and the option premium is $.04 per unit. Your forecast of the percentage change in the spot rate
    was determined from the following regression model:

    Et= a0+a1DINFt-1+a2DINTt+µ
    The regression model was applied to historical annual data, and the regression coefficients were
    estimated as follows:
    a0 = 0.0
    a1 = 1.2
    a2 = 0.7
    Assume last year’s inflation rates were 2 percent for the United States and 8 percent for the
    United Kingdom. Also assume that the interest rate differential (DINT t) is forecasted as follows
    for this year:
    Forecast of DINTt Probability
    1.5% 30%
    2% 40%
    3% 30%

    Using any of the available information, should the treasurer choose the forward hedge or the put
    option hedge? Show your work (5%)

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