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Question 1: FX Futures

Amber McClain, the currency speculator sells 8 June futures contracts for 500,000 pesos at the closing price of $0.10773/Ps? 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. Values 500,000 8.00 Sell $0.12000 $0.10773 $0.01227 ($49,080.00) b. Values 500,000 8.00 Sell $0.09800 $0.10773 ($0.00973) $38,920.00 c. Values 500,000 8.00 Sell $0.11000 $0.10773 $0.00227 ($9,080.00)

Assumptions Number of pesos per futures contract Number of contracts Buy or sell the peso futures? Ending spot rate ($/peso) June futures settle price ($/peso) Spot - Futures Value of total position at maturity (US$) Value = - Notional x (Spot - Futures) x 8

Question 2: Forward Hedge


A U.S. importer that incurs costs in GBP and bills its customers in USD is concerned about the depreciation of USD against GBP due to GBP payables of 10,000,000 in a month. To hedge (protect) the position, the importer decides to use futures markets. Currently GBP contracts (62,500 GBP each) are traded at 1.5290. Spot rate is 1.5310 (i.e., GBP/USD 1.5310). Suppose the importer takes an equal futures position to its cash market position (GBP 10m) at 1.5290. Assume that the futures contract price and spot rates are 1.5995 and 1.6020, respectively, when the hedge is liquidated. What should the unit cost of GBP be for the importer in terms of USD? Assumptions Notional Value Hedge (Long GBP Futures) Future contract price (GBP/USD) - F(0) Sport rate (GBP/USD) - S(0) Future contract price at liquidation (GBP/USD) - F(t) Spot rate at liquidation (GBP/USD) - S(t) Maturity (in month or T=?) {S(t)-F(t)} -{S(t)xQ} {(F(t)-F(0))*Q} -{F(0)+[S(t)-F(t)]}Q -{F(0)+Basis} or -{F(0)+[S(t)-F(t)]} t=0 10,000,000 1.5290 1.5310 t=T

1.5995 1.6020 1 Basis V (Payable) Futures Gain/Loss Total Cost Hedged V(Payable) Unit cost of GBP in terms of USD $0.0025 -$16,020,000.00 $705,000.00 -$15,315,000.00 (1.5315)

Question 3: FX Forward
Christoph Hoffeman of Blade Capital 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. Values $100,000 $0.5820 $0.5640 $0.6250 b. Values $100,000 $0.5820 $0.5640 $0.6250

Assumptions Initial investment (funds available) Current spot rate-S(0) (US$/Swiss franc) Six-month forward rate-F(0) (US$/Swiss franc) Expected spot rate in six months-E[S(t)] (US$/Swiss franc) Strategy for Part a: 1. Use the $100,000 today to buy SF at spot rate 2. Hold the SF. 3. At the end of six months, convert SF at expected rate 4. Yielding expected dollar revenues of 5. Realize profit {[Q/S(0)]xE(S(t)-Q} Strategy for Part b: 1. Buy SF forward six months (no cash outlay required) 2. Fulfill the six months forward in six months cost in US$ 3. Convert the SF into US$ at expected spot rate 4. Realize profit {[Q/F(0)]xE[S(0)]-Q}

SFr. 171,821.31 $0.6250 $107,388.32 $7,388.32

SFr. 177,304.96 ($100,000.00) $110,815.60 $10,815.60

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