Problem 7.

1 Peso futures
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 spotrate is $0.12000/Ps?
b. What is the value of her position at maturity if the ending spotrate is $0.09800/Ps?
c. What is the value of her position at maturity if the ending spotrate is $0.11000/Ps?

Assumptions
Number of pesos per futures contract
Number of contracts
Buy or sell the peso futures?
Ending spot rate ($/peso)
June futures settle price from Exh7.1 ($/peso)
Spot - Futures
Value of total position at maturity (US$)
Value = - Notional x (Spot - Futures) x 8

a)
Values
500,000
8.00
Sell

b)
Values
500,000
8.00
Sell

c)
Values
500,000
8.00
Sell

$0.12000
$0.10773
$0.01227

$0.09800
$0.10773
($0.00973)

$0.11000
$0.10773
$0.00227

($49,080.00)

$38,920.00

($9,080.00)

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 7.7 How much profit -- calls?

Assume a call option on euros is written with a strike price of $1.2500/ at a premium of 3.80 per euro ($0.0380/) and with an expiration date three months from now. The
option is for 100,000. Calculate your profit or loss should you exercise before maturity at a time when the euro is traded spot at .....

Assumptions
Notional principal (euros)
Maturity (days)
Strike price (US$/euro)
Premium (US$/euro)
Ending spot rate (US$/euro)
Gross profit on option
Less premium
Net profit (US$/euro)
Net profit, total

a)
Values
100,000.00
90
$1.2500
$0.0380
$1.1000

b)
Values
100,000.00
90
$1.2500
$0.0380
$1.1500

c)
Values
100,000.00
90
$1.2500
$0.0380
$1.2000

d)
Values
100,000.00
90
$1.2500
$0.0380
$1.2500

e)
Values
100,000.00
90
$1.2500
$0.0380
$1.3000

f)
Values
100,000.00
90
$1.2500
$0.0380
$1.3500

g)
Values
100,000.00
90
$1.2500
$0.0380
$1.4000

$0.0000
($0.0380)
($0.0380)

$0.0000
($0.0380)
($0.0380)

$0.0000
($0.0380)
($0.0380)

$0.0000
($0.0380)
($0.0380)

$0.0500
($0.0380)
$0.0120

$0.1000
($0.0380)
$0.0620

$0.1500
($0.0380)
$0.1120

($3,800.00)

($3,800.00)

($3,800.00)

($3,800.00)

$1,200.00

$6,200.00

$11,200.00

Problem 7.11 U.S. dollar/euro

Pricing Currency Options on the Euro
A U.S.-based firm wishing to buy
or sell euros (the foreign currency)

Value
$1.2480
$1.2500
1.453%
2.187%
1.000
365.00
10.500%

Call option premium (per unit fc)

Put option premium (per unit fc)
(European pricing)

c
p

Call option premium (%)

Put option premium (%)

c
p

Spot rate (domestic/foreign)

Strike rate (domestic/foreign)
Domestic interest rate (% p.a.)
Foreign interest rate (% p.a.)
Time (years, 365 days)
Days equivalent
Volatility (% p.a.)

Variable
S0
X
rd
rf
T

A European firm wishing to buy

or sell dollars (the foreign currency)
Variable
S0

Value
0.8013
0.8000
2.187%
1.453%
1.000
365.00
10.500%

$0.0461
$0.0570

c
p

0.0366
0.0295

3.69%
4.57%

c
p

4.56%
3.68%

X
rd
rf
T

Copyright 2004, Barbara S. Petitt and Michael H. Moffett, Thunderbird, The American Graduate School of International Management.

Problem 7.12 U.S. dollar/Japanese yen

Pricing Currency Options on the Japanese yen
A Japanese firm wishing to buy
or sell dollars (the foreign currency)

Value
JPY 105.64
JPY 100.00
0.089%
1.453%
1.000
365.00
12.000%

Call option premium (per unit fc)

Put option premium (per unit fc)
(European pricing)

c
p

Call option premium (%)

Put option premium (%)

c
p

Spot rate (domestic/foreign)

Strike rate (domestic/foreign)
Domestic interest rate (% p.a.)
Foreign interest rate (% p.a.)
Time (years, 365 days)
Days equivalent
Volatility (% p.a.)

Variable
S0
X
rd
rf
T

A U.S.-based firm wishing to buy

or sell yen (the foreign currency)
Variable
S0
X
rd
rf
T
s

Value
$0.0095
$0.0100
1.453%
0.089%
1.000
365.00
12.000%

JPY 7.27
JPY 3.06

c
p

$0.0003
$0.0007

6.88%
2.90%

c
p

3.06%
7.27%

Copyright 2004, Barbara S. Petitt and Michael H. Moffett, Thunderbird, The Garvin School of International Management.

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/$.
Put option premium (JPY/US$)
Notional principal (US$)
Total cost (JPY)

JPY 3.06
$750,000
JPY 2,297,243

Problem 7.13 Euro/Japanese yen

Pricing Currency Options on the Euro/Yen Crossrate
A Japanese firm wishing to buy
or sell euros (the foreign currency)

Value
JPY 133.89
JPY 136.00
0.088%
2.187%
0.247
90.00
10.000%

Call option premium (per unit fc)

Put option premium (per unit fc)
(European pricing)

c
p

Call option premium (%)

Put option premium (%)

c
p

Spot rate (domestic/foreign)

Strike rate (domestic/foreign)
Domestic interest rate (% p.a.)
Foreign interest rate (% p.a.)
Time (years, 365 days)
Days equivalent
Volatility (% p.a.)

Variable
S0
X
rd
rf
T

A European firm wishing to buy

or sell yen (the foreign currency)
Variable
S0
X
rd
rf
T
s

Value
0.0072
0.0074
2.187%
0.088%
0.247
90.00
10.000%

JPY 1.50
JPY 4.30

c
p

0.0001
0.0002

1.12%
3.21%

c
p

1.30%
2.90%

Copyright 2004, Barbara S. Petitt and Michael H. Moffett, Thunderbird, The Garvin School of International Management.

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.
Put option premium (euro/JPY)
Notional principal (JPY)
Total cost (euro)

0.0002
JPY 10,400,000
2,167.90

Problem 7.14 U.S. dollar/British pound

Pricing Currency Options on the British pound
A U.S.-based firm wishing to buy
or sell pounds (the foreign currency)

Value
$1.8674
$1.8000
1.453%
4.525%
0.493
180.00
9.400%

Call option premium (per unit fc)

Put option premium (per unit fc)
(European pricing)

c
p

Call option premium (%)

Put option premium (%)

c
p

Spot rate (domestic/foreign)

Strike rate (domestic/foreign)
Domestic interest rate (% p.a.)
Foreign interest rate (% p.a.)
Time (years, 365 days)
Days equivalent
Volatility (% p.a.)

Variable
S0
X
rd
rf
T

A British firm wishing to buy

or sell dollars (the foreign currency)
Variable
S0
X
rd
rf

Value
0.5355
0.5556
4.525%
1.453%
0.493
180.00
9.400%

$0.0696
$0.0306

c
p

0.0091
0.0207

3.73%
1.64%

c
p

1.70%
3.87%

Copyright 2004, Barbara S. Petitt and Michael H. Moffett, Thunderbird, The Garvin School of International Management.

Call option premiums for a U.S.-based firm buying call options on the British pound:
180-day maturity ($/pound)
90-day maturity ($/pound)
Difference ($/pound)

$0.0696
$0.0669
$0.0027

The maturity doubled while the option premium rose only about 4%.

Problem 7.15 Euro/British pound

Pricing Currency Options on the British pound/Euro Crossrate
A European firm wishing to buy
or sell pounds (the foreign currency)

Value
1.4730
1.5000
4.000%
4.160%
0.247
90.00
11.400%

Call option premium (per unit fc)

Put option premium (per unit fc)
(European pricing)

c
p

Call option premium (%)

Put option premium (%)

c
p

Spot rate (domestic/foreign)

Strike rate (domestic/foreign)
Domestic interest rate (% p.a.)
Foreign interest rate (% p.a.)
Time (years, 365 days)
Days equivalent
Volatility (% p.a.)

Variable
S0
X
rd
rf
T

A British firm wishing to buy

or sell euros (the foreign currency)
Variable
S0
X
rd
rf

Value
0.6789
0.6667
4.160%
4.000%
0.247
90.00
11.400%

0.0213
0.0487

c
p

0.0220
0.0097

1.45%
3.30%

c
p

3.24%
1.42%

Copyright 2004, Barbara S. Petitt and Michael H. Moffett, Thunderbird, The Garvin School of International Management.

When the euro's interest rate rises from 2.072% to 4.000%, the call option premium on British pounds rises:
Call option on pounds when euro interest is 4.000%
Call option on pounds when euro interest is 2.072%
Change, an increase in the premium

0.0213
0.0189
0.0213