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Problem 8.

1 Amber McClain

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 8.1.

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

Ending spot rate ($/peso) $0.12000 $0.09800 $0.11000


June futures settle price from Exh8.1 ($/peso) $0.10773 $0.10773 $0.10773
Spot - Futures $0.01227 ($0.00973) $0.00227

Value of total position at maturity (US$) ($49,080.00) $38,920.00 ($9,080.00)


Value = - Notional x (Spot - Futures) x 8

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 8.2 Peleh's Puts

Peleh writes a put option on Japanese yen with a strike price of $0.008000/¥ (¥125.00/$) at a premium of 0.0080¢ per yen and with an expiration date six months from
now. The option is for ¥12,500,000. What is Peleh's profit or loss at maturity if the ending spot rates are ¥110/$, ¥115/$, ¥120/$, ¥125/$, ¥130/$, ¥135/$, and ¥140/$.

a) b) c) d) e) f) g)
Assumptions Values Values Values Values Values Values Values
Notional principal (¥) 12,500,000 12,500,000 12,500,000 12,500,000 12,500,000 12,500,000 12,500,000
Maturity (days) 180 180 180 180 180 180 180
Strike price (US$/¥) $0.008000 $0.008000 $0.008000 $0.008000 $0.008000 $0.008000 $0.008000
Premium (US$/¥) $0.000080 $0.000080 $0.000080 $0.000080 $0.000080 $0.000080 $0.000080

Ending spot rate (¥/US$) 110.00 115.00 120.00 125.00 130.00 135.00 140.00
in US$/¥ $0.009091 $0.008696 $0.008333 $0.008000 $0.007692 $0.007407 $0.007143

Gross profit on option $0.000000 $0.000000 $0.000000 $0.000000 $0.000308 $0.000593 $0.000857
Less premium ($0.000080) ($0.000080) ($0.000080) ($0.000080) ($0.000080) ($0.000080) ($0.000080)
Net profit (US$/¥) ($0.000080) ($0.000080) ($0.000080) ($0.000080) $0.000228 $0.000513 $0.000777

Net profit, total ($1,000.00) ($1,000.00) ($1,000.00) ($1,000.00) $2,846.15 $6,407.41 $9,714.29
Problem 8.3 Ventosa Investments

Jamie Rodriguez, a currency trader for Chicago-based Ventosa Investments, uses the following futures quotes on the British pound (£) to speculate on the value
of the pound.

British Pound Futures, US$/pound (CME) Contract = 62,500 pounds


Open
Maturity Open High Low Settle Change High Interest
March 1.4246 1.4268 1.4214 1.4228 0.0032 1.4700 25,605
June 1.4164 1.4188 1.4146 1.4162 0.0030 1.4550 809

a. If Jaime buys 5 June pound futures, and the spot rate at maturity is $1.3980/£, what is the value of her position?
b. If Jamie sells 12 March pound futures, and the spot rate at maturity is $1.4560/£, what is the value of her position?
c. If Jamie buys 3 March pound futures, and the spot rate at maturity is $1.4560/£, what is the value of her position?
d. If Jamie sells 12 June pound futures, and the spot rate at maturity is $1.3980/£, what is the value of her position?

a) b) c) d)
Assumptions Values Values Values Values
Pounds (₤) per futures contract £62,500 £62,500 £62,500 £62,500
Maturity month June March March June
Number of contracts 5 12 3 12
Did she buy or sell the futures? buys sells buys sells

Ending spot rate ($/₤) $1.3980 $1.4560 $1.4560 $1.3980


Pound futures contract, settle price ($ $1.4162 $1.4228 $1.4228 $1.4162
Spot - Futures ($0.0182) $0.0332 $0.0332 ($0.0182)

Value of position at maturity ($) ($5,687.50) ($24,900.00) $6,225.00 $13,650.00


buys: Notional x (Spot - Futures) x contracts
sells: Notional x (Spot - Futures) x contracts

Interpretation
Buys a future: Jamie buys at the futures price and sells at the ending spot price. She therefore profits when the futures price
is less than the ending spot price.
Sells a future: Jamie buys at the ending spot price and sells at the futures price. She therefore profits when the futures price
is greater than the ending spot price.
Problem 8.4 Sallie Schnudel

Sallie Schnudel trades currencies for Keystone 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:

Option Strike Price Premium


Put on Sing $ $0.6500/S$ $0.00003/S$
Call on Sing $ $0.6500/S$ $0.00046/S$

a. Should Sallie buy a put on Singapore dollars or a call on Singapore dollars?


b. What is Sallie's breakeven price on the option purchased in part (a)?
c. Using your answer from part (a), what is Sallie's gross profit and net profit (including premium) if the spot rate at the
end of 90 days is indeed $0.7000/S$?
d. Using your answer from part (a), what is Sallie's gross profit and net profit (including premium) if the spot rate at the
end of 90 days is $0.8000/S$?

Option choices on the Singapore dollar: Call on S$ Put on S$


Strike price (US$/Singapore dollar) $0.6500 $0.6500
Premium (US$/Singapore dollar) $0.00046 $0.00003

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

a. Should Sallie buy a put on Singapore dollars or a call on Singapore dollars?

Since Sallie 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.)

b. What is Sallie's breakeven price on the option purchased in part a)?


Per S$
Strike price $0.65000
Note this does not include any interest cost on the premium. Plus premium $0.00046
Breakeven $0.65046

c. What is Sallie's gross profit and net profit (including premium) if the ending spot rate is $0.70/S$?

Gross profit Net profit


(US$/S$) (US$/S$)
Spot rate $0.70000 $0.70000
Less strike price ($0.65000) ($0.65000)
Less premium ($0.00046)
Profit $0.05000 $0.04954

d. What is Sallie's gross profit and net profit (including premium) if the ending spot rate is $0.80/S$?

Gross profit Net profit


(US$/S$) (US$/S$)
Spot rate $0.80000 $0.80000
Less strike price ($0.65000) ($0.65000)
Less premium ($0.00046)
Profit $0.15000 $0.14954
Problem 8.5 Blade Capital (A)

Christoph Hoffeman trades currency for Blade 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

Strategy for Part a):

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.

Initial investment principle $10,000,000.00


30 day forward rate (US$/€) $1.3350
Euros bought forward (Investment / forward rate) € 7,490,636.70
Spot rate in open market at end of 30 days (US$/€) $1.3600
US$ proceeds (euros bought forward exchanged to US$ spot) $10,187,265.92
Profit in US$ $187,265.92

Strategy for Part b):


Again, a profitable strategy can be executed without any actual cash flow changing hands at the beginning of the period. Since
Christoph believes that the dollar will strengthen to $1.28 in 30 days, he should sell euros forward now at the higher dollar
rate, wait 30 days and buy the euros needed on the open market at $1.28, and immediately then use those euros to fulfill his
forward contract to sell euros for dollars at $1.3350. For a profit.

Investment funds needed in 30 days $10,000,000.00


Spot rate in open market at end of 30 days $1.2800
Euros bought in open market in 30 days (Investment / spot rate) € 7,812,500.00

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 8.6 Blade Capital (B)

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. 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

Strategy for Part a:


1. Use the $100,000 today to buy SF at spot rate SFr. 171,821.31
2. Hold the SF indefinitely.
3. At the end of six months, convert SF at expected rate $0.6250
4. Yielding expected dollar revenues of $107,388.32
5. Realize profit (revenues less $100,000 initial invest) $7,388.32

Strategy for Part b:


1. Buy SF forward six months (no cash outlay required)
2. Fulfill the six months forward in six months SFr. 177,304.96
cost in US$ ($100,000.00)
3. Convert the SF into US$ at expected spot rate $110,815.60
4. Realize profit $10,815.60
Problem 8.7 Chavez S.A.

Chavez S.A., a Venezuelan company, wishes to borrow $8,000,000 for eight weeks. A rate of 6.250% per annum is quoted
by potential lenders in New York, Great Britain, and Switzerland using, respectively, international, British, and the Swiss-
Eurobond definitions of interest (day count conventions). From which source should Chavez borrow?

Assumptions Values
Principal borrowing need $ 200,000,000
Maturity needed, in weeks 4
Rate of interest charged by ALL potential lenders 6.250%

New York interest rate practices


Interest calculation uses:
Exact number of days in period 56
Number of days in financial year 360
So the interest charge on this principal is $ 1,944,444.44

Great Britain interest rate practices


Interest calculation uses:
Exact number of days in period 56
Number of days in financial year 360
So the interest charge on this principal is $ 1,944,444.44

Swiss interest rate practices


Interest calculation uses:
Assumed 30 days per month for two months 60
Number of days in financial year 360
So the interest charge on this principal is $ 2,083,333.33

Andina should borrow in Great Britain because it has the lowest interest cost.
Problem 8.8 Botany Bay Corporation

Botany Bay Corporation of Australia seeks to borrow US$30,000,000 in the Eurodollar market. Funding is needed for two years.
Investigation leads to three possibilities. Compare the alternatives and make a recommendation.

#1. Botany Bay could borrow the US$30,000,000 for two years at a fixed 5% rate of interest
#2. Botany Bay could borrow the US$30,000,000 at LIBOR + 1.5%. LIBOR is currently 3.5%, and the rate would be reset every six
months
#3. Botany Bay could borrow the US$30,000,000 for one year only at 4.5%. At the end of the first year Botany Bay would have to
negotiate for a new one-year loan.

Assumptions Values
Principal borrowing need $ 200,000,000
Maturity needed, in years 2.00
Fixed rate, 2 years 5.000%
Floating rate, six-month LIBOR + spread
Current six-month LIBOR 3.500%
Spread 1.500%
Fixed rate, 1 year, then re-fund 4.500%

First 6-months Second 6-months Third 6-months Fourth 6-months


#1: Fixed rate, 2 years
Interest cost per year $ 10,000,000 $ 10,000,000
Certainty over access to capital Certain Certain Certain Certain
Certainty over cost of capital Certain Certain Certain Certain

#2: Floating rate, six-month LIBOR + spread


Interest cost per year $ 5,000,000 $ 5,000,000 $ 5,000,000 $ 5,000,000
Certainty over access to capital Certain Certain Certain Certain
Certainty over cost of capital Certain Uncertain Uncertain Uncertain

#3: Fixed rate, 1 year, then re-fund


Interest cost per year $ 9,000,000 ??? ???
Certainty over access to capital Certain Certain Uncertain Uncertain
Certainty over cost of capital Certain Certain Uncertain Uncertain

Only alternative #1 has a certain access and cost of capital for the full 2 year period.
Alternative #2 has certain access to capital for both years, but the interest costs in the final 3 of 4 periods is uncertain.
Alternatvie #3, possessing a lower interest cost in year 1, has no guaranteed access to capital in the second year.
Depending on the company's business needs and tolerance for interest rate risk, it could choose between #1 and #2.
Problem 8.9 Vatic Capital

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:

Option Strike Price Premium


Put on yen ¥125/$ $0.00003/S$
Call on yen ¥125/$ $0.00046/S$

a. Should Cachita buy a put on yen or a call on yen?


b. What is Cachita's breakeven price on the option purchased in part (a)?
c. Using your answer from part (a), what is Cachita's gross profit and net profit (including premium) if the
spot rate at the end of 90 days is ¥140/$?

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

Call on yen Put on yen


Strike price (yen/US$) 125.00 125.00
in US$/yen $0.00800 $0.00800
Premium (US$/yen) $0.00046 $0.00003

a. Should she buy a call on yen or a put on yen?


Cachita should buy a put on yen to profit from the rise of the dollar (the fall of the yen).

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/$?

Gross profit Net profit


(US$/yen) (US$/yen)
Strike price $0.00800 $0.00800
Less spot rate -$0.00714 -$0.00714
Less premium -$0.00003
Profit $0.00086 $0.00083
Problem 8.10 Calling All Profits

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 .....

Note: the option premium is 3.8 cents per euro, not 38 cents per euro.

a. b. c. d. e. f. g.
Assumptions Values Values Values Values Values Values Values
Notional principal (euros) € 100,000.00 € 100,000.00 € 100,000.00 € 100,000.00 € 100,000.00 € 100,000.00 € 100,000.00
Maturity (days) 90 90 90 90 90 90 90
Strike price (US$/euro) $1.2500 $1.2500 $1.2500 $1.2500 $1.2500 $1.2500 $1.2500
Premium (US$/euro) $0.0380 $0.0380 $0.0380 $0.0380 $0.0380 $0.0380 $0.0380
Ending spot rate (US$/euro) $1.1000 $1.1500 $1.2000 $1.2500 $1.3000 $1.3500 $1.4000

Gross profit on option $0.0000 $0.0000 $0.0000 $0.0000 $0.0500 $0.1000 $0.1500
Less premium ($0.0380) ($0.0380) ($0.0380) ($0.0380) ($0.0380) ($0.0380) ($0.0380)
Net profit (US$/euro) ($0.0380) ($0.0380) ($0.0380) ($0.0380) $0.0120 $0.0620 $0.1120

Net profit, total ($3,800.00) ($3,800.00) ($3,800.00) ($3,800.00) $1,200.00 $6,200.00 $11,200.00
Problem 8.11 Mystery 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.

Strike Price Maturity Premium


$1.36/£ 30 days $0.00081/£
$1.34/£ 30 days $0.00021/£
$1.32/£ 30 days $0.00004/£
$1.36/£ 60 days $0.00333/£
$1.34/£ 60 days $0.00150/£
$1.32/£ 60 days $0.00060/£

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

Put options on pounds Put #1 Put #2 Put #3


Strike price (US$/£) $1.36 $1.34 $1.32
Maturity (days) 30 30 30
Premium (US$/£) $0.0008 $0.0002 $0.0000

Put options on pounds Put #4 Put #5 Put #6


Strike price (US$/£) $1.36 $1.34 $1.32
Maturity (days) 60 60 60
Premium (US$/£) $0.0033 $0.0015 $0.0006

Issues for Sydney to consider:

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.)

2. The choice of which strike price is an interesting debate.


* The lower the strike price (1.34 or 1.32), the cheaper the option price.
* The reason they are cheaper is that, statistically speaking, they are increasingly less likely to end up in the money.
* The choice, given that all the options are relatively "cheap," is to pick the strike price which will yield the required return.
* The $1.32 strike price is too far 'down,' given that Sydney only expects the pound to fall to about $1.32.

Put #4 Put #5 Put #6


Net profit Net profit Net profit
Strike price $1.36000 $1.34000 $1.32000
Less expected spot rate (1.32000) (1.32000) (1.32000)
Less premium (0.00333) (0.00150) (0.00060)
Profit $0.03667 $0.01850 ($0.00060)

If Sydney invested an individual's principal purely


in this specific option, they would purchase an
option of the following notional principal (£): £75,075,075.08 £166,666,666.67 £416,666,666.67

Expected profit, in total (profit rate x notional): $2,753,003.00 $3,083,333.33 -$250,000.00


Initial investment at current spot rate $356,500.00 $356,500.00 $356,500.00
Return on Investment (ROI) 772% 865% -70%
Risk: They could lose it all (full premium)
Problem 8.12 Contrarious Calandra

Calandra Panagakos works for CIBC Currency Funds in Toronto. Calandra is something of a contrarian -- as opposed
to most of the forecasts, she believes the Canadian dollar (C$) will appreciate versus the U.S. dollar over the coming
90 days. The current spot rate is $0.6750/C$. Calandra may choose between the following options on
the Canadian dollar:
Option Strike Price Premium
Put on C$ $0.7000 $0.00003/S$
Call on C$ $0.7000 $0.00049/S$

a. Should Calandra buy a put on Canadian dollars or a call on Canadian dollars?


b. What is Calandra's breakeven price on the option purchased in part (a)?
c. Using your answer from part (a), what is Calandra's gross profit and net profit (including premium) if the spot rate
at the end of 90 days is indeed $0.7600?
d. Using your answer from part (a), what is Calandra's gross profit and net profit (including premium) if the spot rate
at the end of 90 days is $0.8250?

Assumptions Values
Current spot rate (US$/Canadian dollar) $0.6750
Days to maturity 90

Option choices on the Canadian dollar: Call option Put option


Strike price (US$/Canadian dollar) $0.7000 $0.7000
Premium (US$/Canadian dollar) $0.00049 $0.0003

a) Which option should Calandra buy?

Since Giri expects the Canadian dollar to appreciate versus the US dollar, he should buy a call on Canadian dollars.

b) What is Calandra's breakeven price on the option purchased in part a)?

Strike price $0.7000


Plus premium 0.00049
Breakeven $0.7005

c) What is Calandra's gross profit and net profit (including premium) if the ending spot rate is $0.7600/C$?

Gross profit Net profit


(US$/C$) (US$/C$)
Spot rate $0.7600 $0.7600
Less strike price (0.7000) (0.7000)
Less premium (0.00049)
Profit $0.0600 $0.05951

d) What is Calandra's gross profit and net profit (including premium) if the ending spot rate is $0.8250/C$?

Gross profit Net profit


(US$/C$) (US$/C$)
Spot rate $0.8250 $0.8250
Less strike price (0.7000) (0.7000)
Less premium (0.00049)
Profit $0.1250 $0.12451
Problem 8.13 Raid Gauloises

Raid Gauloises is a rapidly growing French sporting goods and adventure racing outfitter. The company has decided to borrow €20,000,000 via a
euro-euro floating rate loan for four years. Raid must decide between two competing loan offerings from two of its banks.

Banque de Paris has offered the four-year debt at euro-LIBOR + 2.00% with an up-front initiation fee of 1.8%. Banque de Sorbonne, however,
has offered euro-LIBOR + 2.5%, a higher spread, but with no loan initiation fees up-front, for the same term and principal. Both banks reset the
interest rate at the end of each year.

Euro-LIBOR is currently 4.00%. Raid’s economist forecasts that LIBOR will rise by 0.5 percentage points each year. Banque de Sorbonne,
however, officially forecasts euro-LIBOR to begin trending upward at the rate of 0.25 percentage points per year. Raid Gauloises’s cost of capital is
11%. Which loan proposal do you recommend for Raid Gauloises?

Expected Chg
Assumptions Values in LIBOR
Principal borrowing need € 20,000,000
Maturity needed, in DAYS 30.00
Current euro-LIBOR 4.000%
Banque de Paris' spread & expectation 2.000% 0.500%
Banque de Paris' initiation fee 1.800%
Banque de Sorbonne's spread & expectation 2.500% 0.250%
Banque de Sorbonne's initiation fee 0.000%

Raid Gauloises must evaluate both loan proposals under both potential interest rate scenarios.

Banque de Paris Loan Proposal Year 0 Year 1 Year 2 Year 3 Year 4


Expected interest rates & payments:
Expected euro-LIBOR 4.000% 4.500% 5.000% 5.500% 6.000%
Bank spread 2.000% 2.000% 2.000% 2.000% 2.000%
Interest rate 6.000% 6.500% 7.000% 7.500% 8.000%

Funds raised, net of fees € 19,640,000


Expected interest costs -€ 1,300,000 -€ 1,400,000 -€ 1,500,000 -€ 1,600,000
Repayment of principal -€ 20,000,000
Total cash flows € 19,640,000 -€ 1,300,000 -€ 1,400,000 -€ 1,500,000 -€ 21,600,000

All-in-cost of funds if:


euro-LIBOR rises 0.500% per year 7.7438%
euro-LIBOR rises 0.250% per year 7.1365% Found by plugging in .250% in expectations above.

Banque de Sorbonne Loan Proposal Year 0 Year 1 Year 2 Year 3 Year 4


Expected interest rates & payments:
Expected euro-LIBOR 4.000% 4.250% 4.500% 4.750% 5.000%
Bank spread 2.500% 2.500% 2.500% 2.500% 2.500%
Interest rate 6.500% 6.750% 7.000% 7.250% 7.500%

Funds raised, net of fees € 20,000,000


Expected interest costs -€ 1,350,000 -€ 1,400,000 -€ 1,450,000 -€ 1,500,000
Repayment of principal -€ 20,000,000
Total cash flows € 20,000,000 -€ 1,350,000 -€ 1,400,000 -€ 1,450,000 -€ 21,500,000

All-in-cost of funds if:


euro-LIBOR rises 0.500% per year 7.0370% Found by plugging in .500% in expectations above.
euro-LIBOR rises 0.250% per year 7.1036%

The Banque de Sorbonne loan proposal is actually lower all-in-cost under either interest rate scenario.
Problem 8.14 Schifano Motors

Schifano Motors of Italy recently took out a 4-year €5 million loan on a floating rate basis. It is now worried, however, about rising interest costs. Although it had initially believed interest
rates in the Euro-zone would be trending downward when taking out the loan, recent economic indicators show growing inflationary pressures. Analysts are predicting that the European
Central Bank will slow monetary growth driving interest rates up.

Schifano is now considering whether to seek some protection against a rise in euro-LIBOR, and is considering a Forward Rate Agreement (FRA) with an insurance company. According
to the agreement, Schifano would pay to the insurance company at the end of each year the difference between its initial interest cost at LIBOR + 2.50% (6.50%) and any fall in interest cost
due to a fall in LIBOR. Conversely, the insurance company would pay to Schifano 70% of the difference between Schifano’s initial interest cost and any increase in interest costs caused by a
rise in LIBOR.

Purchase of the floating Rate Agreement will cost €100,000, paid at the time of the initial loan. What are Schifano’s annual financing costs now if LIBOR rises and if LIBOR falls.?
Schifano uses 12% as its weighted average cost of capital. Do you recommend that Schifano purchase the FRA?

Assumptions Values
Principal borrowing need € 5,000,000
Maturity needed, in years 4.00
Current LIBOR 4.000%
Felini's bank spread 2.500%
Proportion of differential paid by FRA 70%
Cost of FRA € 100,000

If LIBOR Falls 50 Basis Pts Per Year Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

Expected annual change in LIBOR -0.500%

LIBOR 4.000% 3.500% -0.500% 3.500% 3.000% 3.000% 2.500% 2.000%


Bank spread 2.500% 2.500% 2.500% 2.500% 2.500% 2.500% 2.500% 2.500%
Interest rate 6.500% 6.000% 2.000% 6.000% 5.500% 5.500% 5.000% 4.500%

Funds raised, net of fees € 5,000,000


Expected interest (interest rate x principal) -€ 300,000 -€ 100,000 -€ 300,000 -€ 275,000 -€ 275,000 -€ 250,000 -€ 225,000
Forward Rate Agreement -€ 100,000 -€ 25,000 -€ 225,000 -€ 25,000 -€ 50,000 -€ 50,000 -€ 75,000 -€ 100,000
Repayment of principal -€ 5,000,000
Total cash flows € 4,900,000 -€ 325,000 -€ 325,000 -€ 325,000 -€ 325,000 -€ 325,000 -€ 325,000 -€ 5,325,000

All-in-cost of funds (IRR) 6.869%

If LIBOR Rises 50 Basis Pts Per Year Year 0 Year 1 Year 2 Year 2 Year 2 Year 3 Year 3 Year 4

Expected annual change in LIBOR 0.500%

LIBOR 4.000% 4.500% 0.500% 4.500% 5.000% 5.000% 5.500% 6.000%


Bank spread 2.500% 2.500% 2.500% 2.500% 2.500% 2.500% 2.500% 2.500%
Interest rate 6.500% 7.000% 3.000% 7.000% 7.500% 7.500% 8.000% 8.500%

Funds raised, net of fees € 5,000,000


Expected interest (interest rate x principal) -€ 350,000 -€ 150,000 -€ 350,000 -€ 375,000 -€ 375,000 -€ 400,000 -€ 425,000
Forward Rate Agreement -€ 100,000 € 17,500 €0 € 17,500 € 35,000 € 35,000 € 52,500 € 70,000
Repayment of principal -€ 5,000,000
Total cash flows € 4,900,000 -€ 332,500 -€ 150,000 -€ 332,500 -€ 340,000 -€ 340,000 -€ 347,500 -€ 5,355,000

All-in-cost of funds (IRR) 6.559%

This rather unusual forward rate agreement is somewhat one-sided in the favor of the insurance company. When Schifano is correct, Schifano pays the full difference in rates to the insurance
company. But when interest rates move against Schifano, the insurance company pays Schifano only 70% of the difference in rates. And all of that is after Schifano paid €100,000 up-front
for the agreement regardless of outcome. Not a very good deal.

A final note of significance is that since Schifano receives only 70% of the difference in rates, its total cost of funds is not effectively "capped"; they could in fact rise with no limit over the
period as interest rates rose.
Problem 8.15 Chrysler LLC

Chrysler LLC, the now privately held company sold-off by DaimlerChrysler, must pay floating rate interest
three months from now. It wants to lock in these interest payments by buying an interest rate futures
contract. Interest rate futures for three months from now settled at 93.07, for a yield of 6.93% per annum.

a. If the floating-rate interest three months from now is 6.00%, what did Chrysler gain or lose?
b. If the floating-rate interest three months from now is 8.00% , what did Chrysler gain or lose?

Assumptions Values
Interest rate futures, closing price 93.07
Effective yield on interest rate futures 6.930%

Three Months From Now


Floating Rate is Floating Rate is
Chrysler's interest rate payments with futures 6.000% 8.000%

Interest payment due in three months 6.000% 8.000%


Sell a future (take a short position) -6.930% -6.930%
Gain or loss on position -0.930% 1.070%
Loss Gain
Problem 8.16 CB Solutions

Heather O'Reilly, the treasurer of CB Solutions, believes interest rates are going to rise, so she wants to swap her future
floating rate interest payments for fixed rates. At present she is paying LIBOR + 2% per annum on $5,000,000 of debt for the
next two years, with payments due semiannually. LIBOR is currently 4.00% per annum. Heather has just made an interest
payment today, so the next payment is due six months from today.

Heather finds that she can swap her current floating rate payments for fixed payments of 7.00% per annum. (CB
Solutions's weighted average cost of capital is 12%, which Heather calculates to be 6% per six month period, compounded
semiannually).

a. If LIBOR rises at the rate of 50 basis points per six month period, starting tomorrow, how much does Heather save or cost
her company by making this swap?

b. If LIBOR falls at the rate of 25 basis points per six month period, starting tomorrow, how much does Heather save or cost
her company by making this swap?

Assumptions Values
Notional principal $ 5,000,000
LIBOR, per annum 4.000%
Spread paid over LIBOR, per annum 2.000%
Swap rate, to pay fixed, per annum 7.000%

First Second Third Fourth


Interest & Swap Payments 6-months 6-months 6-months 6-months

a. LIBOR increases 50 basis pts/6 months 0.500%


Expected LIBOR 4.500% 5.000% 5.500% 6.000%

Current loan agreement:


Expected LIBOR (for 6 months) -2.250% -2.500% -2.750% -3.000%
Spread (for 6 months) -1.000% -1.000% -1.000% -1.000%
Expected interest payment -3.250% -3.500% -3.750% -4.000%

Swap Agreement:
Pay fixed (for 6-months) -3.500% -3.500% -3.500% -3.500%
Receive floating (LIBOR for 6 months) 2.250% 2.500% 2.750% 3.000%

Net interest (loan + swap) -4.500% -4.500% -4.500% -4.500%

Swap savings?
Net interest after swap $ (225,000) $ (225,000) $ (225,000) $ (225,000)
Loan agreement interest (162,500) (175,000) (187,500) (200,000)
Swap savings (swap cost) $ (62,500) $ (50,000) $ (37,500) $ (25,000)

b. LIBOR decreases 25 basis pts/6 months -0.250%


Expected LIBOR 3.750% 3.500% 3.250% 3.000%

Current loan agreement:


Expected LIBOR (for 6 months) -1.875% -1.750% -1.625% -1.500%
Spread (for 6 months) -1.000% -1.000% -1.000% -1.000%
Expected interest payment -2.875% -2.750% -2.625% -2.500%

Swap Agreement:
Pay fixed (for 6-months) -3.500% -3.500% -3.500% -3.500%
Receive floating (LIBOR for 6 months) 1.875% 1.750% 1.625% 1.500%

Net interest (loan + swap) -4.500% -4.500% -4.500% -4.500%

Swap savings?
Net interest after swap $ (225,000) $ (225,000) $ (225,000) $ (225,000)
Loan agreement interest (143,750) (137,500) (131,250) (125,000)
Swap savings (swap cost) $ (81,250) $ (87,500) $ (93,750) $ (100,000)

In both cases CB Solutions is suffering higher total interest costs as a result of the swap.
Problem 8.17 Lluvia and Paraguas

Lluvia Manufacturing and Paraguas Products both seek funding at the lowest possible cost. Lluvia
would prefer the flexibility of floating rate borrowing, while Paraguas wants the security of fixed rate
borrowing. Lluvia is the more credit-worthy company. They face the following rate structure. Lluvia,
with the better credit rating, has lower borrowing costs in both types of borrowing.

Lluvia wants floating rate debt, so it could borrow at LIBOR+1%. However it could borrow fixed at
8% and swap for floating rate debt. Paraguas wants fixed rate, so it could borrow fixed at 12%.
However it could borrow floating at LIBOR+2% and swap for fixed rate debt. What should they do?

Assumptions Xavier Zulu


Credit rating AAA BBB
Prefers to borrow Floating Fixed
Fixed-rate cost of borrowing 8.000% 12.000%
Floating-rate cost of borrowing:
LIBOR (value is unimportant) 5.000% 5.000%
Spread 1.000% 2.000%
Total floating-rate 6.000% 7.000%

Comparative Advantage in Borrowing Values


Lluvia's absolute advantage:
in fixed rate borrowing 4.000%
in floating-rate borrowing 1.000%
Comparative advantage in fixed rate 3.000%

One Possibility Xavier Zulu


Lluvia borrows fixed -8.000% ---
Paraguas borrows floating --- -7.000%
Lluvia pays Paraguas floating (LIBOR) -5.000% 5.000%
Paraguas pays Lluvia fixed 8.500% -8.500%
Net interest after swap -4.500% -10.500%

Savings (own borrowing versus net swap):


If Lluvia borrowed floating 6.000%
If Lluvia borrows fixed & swaps with Paraguas 4.500%
1.500%

If Paraguas borrows fixed 12.000%


If Paraguas borrows floating & swaps with Lluvia 10.500%
1.500%

The 3.0% comparative advantage enjoyed by Lluvia represents the opportunity set for improvement for
both parties. This could be a 1.5% savings for each (as in the example shown) or any other combination
which distributes the 3.0% between the two parties.
Problem 8.18 Trident's Cross Currency Swap: Sfr for US$

Trident Corporation entered into a three-year cross currency interest rate swap to receive U.S. dollars and pay Swiss francs. Trident, however,
decided to unwind the swap after one year – thereby having two years left on the settlement costs of unwinding the swap after one year. Repeat the
calculations for unwinding, but assume that the following rates now apply:

Assumptions Values Swap Rates 3- year bid 3-year ask


Notional principal $ 10,000,000 Original: US dollar 5.56% 5.59%
Original spot exchange rate, SFr./$ 1.5000 Original: Swiss franc 1.93% 2.01%
New (1-year later) spot exchange rate, SFr./$ 1.5560
New fixed US dollar interest 5.20%
New fixed Swiss franc interest 2.20%

a. Interest & Swap Payments Year 0 Year 1 Year 2 Year 3

Receive fixed rate dollars at this rate: 5.56% 5.56% 5.56%


On a notional principal of: $ 10,000,000
Trident will receive cash flows: → ### → ### → ###

Exchange rate, time of swap (SFr./$) 1.5000

Trident will pay cash flows: → SFr. 301,500 → SFr. 301,500 → SFr. 15,301,500
On a notional principal of: SFr. 15,000,000
Pay fixed rate Swiss francs at this rate: 2.01% 2.01% 2.01%

b. Unwinding the swap after one-year Year 1 Year 2 Year 3

Remaining dollar cash inflows $ 556,000 $ 10,556,000


PV factor at now current fixed $ interest 5.20% 0.9506 0.9036
PV of remaining dollar cash inflows $ 528,517 $ 9,538,232
Cumulative PV of dollar cash inflows $ 10,066,750

Remaining Swiss franc cash outflows SFr. 301,500 SFr. 15,301,500


PV factor at now current fixed SF interest 2.20% 0.9785 0.9574
PV of remaining SF cash outflows SFr. 295,010 SFr. 14,649,818
Cumulative PV of SF cash outflows SFr. 14,944,827
New current spot rate, SFr./$ 1.5560
Cumulative PF of SF cash outflows in $ $ 9,604,645

Settlement:
Cash inflow $ 10,066,750
Cash outflow (9,604,645)
Net cash settlement of unwinding $ 462,105 This is a cash receipt by Trident from the swap dealer.
Problem 8.19 Trident's Cross Currency Swap: Yen for Euros

Using the table of swap rates in the chapter (Exhibit 8.13), and assume Trident enters into a swap agreement to receive euros and pay Japanese
yen, on a notional principal of €5,000,000. The spot exchange rate at the time of the swap is ¥104/€.

a. Calculate all principal and interest payments, in both euros and Swiss francs, for the life of the swap agreement.

b. Assume that one year into the swap agreement Trident decides it wishes to unwind the swap agreement and settle it in euros. Assuming that a
two-year fixed rate of interest on the Japanese yen is now 0.80%, and a two-year fixed rate of interest on the euro is now 3.60%, and the spot rate
of exchange is now ¥114/€, what is the net present value of the swap agreement? Who pays whom what?

Assumptions Values Swap Rates 3- year bid 3-year ask


Notional principal € 5,000,000 Euros -- € 3.24% 3.28%
Spot exchange rate, Yen/euro 104.00 Japanese yen 0.56% 0.59%

a) Interest & Swap Payments Year 0 Year 1 Year 2 Year 3

Receive fixed rate euros at this rate: 3.24% 3.24% 3.24%


On a notional principal of: € 5,000,000
Trident will receive cash flows: → ### → ### → ###

Exchange rate, time of swap (¥/€) 104.00

Trident will pay cash flows: → 3,068,000 → 3,068,000 → 523,068,000
On a notional principal of (yen): 520,000,000
Pay fixed rate Japanese yen at this rate: 0.59% 0.59% 0.59%

b) Unwinding the swap after one-year Year 1 Year 2 Year 3

Remaining euro cash inflows € 162,000 € 5,162,000


PV factor at now current fixed € interest 3.60% 0.9653 0.9317
PV of remaining € cash inflows € 156,371 € 4,809,484
Cumulative PV of € cash infllows € 4,965,855

Remaining ¥ cash outflows SFr. 3,068,000 SFr. 523,068,000


PV factor at now current fixed ¥ interest 0.80% 0.9921 0.9842
PV of remaining ¥ cash outflows SFr. 3,043,651 SFr. 514,798,280
Cumulative PV of ¥ cash outflows 517,841,931
New current spot rate, ¥/€ 114.00
Cumulative PV of ¥ cash outflows in € € 4,542,473

Settlement:
Cash inflow € 4,965,855
Cash outflow (4,542,473)
Net cash settlement of unwinding € 423,382 This is a cash receipt by Trident from the swap dealer.
Problem 8.20 Falcor

Falcor is the U.S.-based automotive parts supplier which was spun-off from General Motors in 2000. With annual sales of over $26 billion, the company has expanded its
markets far beyond the traditional automobile manufacturers in the pursuit of a more diversified sales base. As part of the general diversification effort, the company wishes to
diversify the currency of denomination of its debt portfolio as well. Assume Falcor enters into a $50 million 7-year cross currency interest rate swap to do just that – pay euro
and receive dollars. Using the data in Exhibit 8.13, solve the following:

a. Calculate all principal and interest payments in both currencies for the life of the swap.

b. Assume that three years later Falcor decides to unwind the swap agreement. If 4-year fixed rates of interest in euros have now risen to 5.35% and 4-year fixed rate dollars
have fallen to 4.40%, and the current spot exchange rate of $1.02/€, what is the net present value of the swap agreement? Who pays who mwhat?

Assumptions Values Swap Rates 7- year bid 7-year ask


Notional principal $ 50,000,000 US dollar 5.86% 5.89%
Spot exchange rate, $/€ 1.16 Euros 4.01% 4.05%

a. Interest & Swap Payments Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

Receive fixed rate dollars at rate: 5.86%


Notional principal of: $ 50,000,000
Receive cash inflows of: $ 2,930,000 $ 2,930,000 $ 2,930,000 $ 2,930,000 $ 2,930,000 $ 2,930,000 $ 52,930,000

Spot exchange rate, $/€ 1.16

Pay cash outflows of: € 1,745,690 € 1,745,690 € 1,745,690 € 1,745,690 € 1,745,690 € 1,745,690 € 44,849,138
Notional principal of: € 43,103,448
Pay fixed rate euros at rate: 4.05%

b. Unwindingthe Swap Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

If the swap is unwound three years later, there are four years of cash flows remaining:

Remaining dollar cash inflows $ 2,930,000 $ 2,930,000 $ 2,930,000 $ 52,930,000


PV factor at now current fixed $ interest 4.40% 0.9579 0.9175 0.8788 0.8418
PV of remaining dollar cash inflows $ 2,806,513 $ 2,688,231 $ 2,574,934 $ 44,555,354
Cumulative PV of $ cash infllows $ 52,625,033

Remaining euro cash outflows € 1,745,690 € 1,745,690 € 1,745,690 € 44,849,138


PV factor at now current fixed € interest 5.35% 0.9492 0.9010 0.8553 0.8118
PV of remaining euro cash outflows € 1,657,038 € 1,572,889 € 1,493,012 € 36,409,603
Cumulative PV of € cash outflows € 41,132,542
Spot exchange rate at unwinding ($/€) 1.02
Cumulative PV of € cash outflows, $ $ 41,955,193

Settlement:
Cash inflow $ 52,625,033
Cash outflow (41,955,193)
Net cash settlement of unwinding $ 10,669,840 This is a net cash payment to Falcor from the swap dealer.
Problem 8.21 U.S. dollar/Euro

Pricing Currency Options on the Euro


A U.S.-based firm wishing to buy A European firm wishing to buy
or sell euros (the foreign currency) or sell dollars (the foreign currency)

Variable Value Variable Value


Spot rate (domestic/foreign) S0 $1.2480 S0 € 0.8013
Strike rate (domestic/foreign) X $1.2500 X € 0.8000
Domestic interest rate (% p.a.) rd 1.453% rd 2.187%
Foreign interest rate (% p.a.) rf 2.187% rf 1.453%
Time (years, 365 days) T 1.000 T 1.000
Days equivalent 365.00 365.00
Volatility (% p.a.) s 12.000% s 12.000%

Call option premium (per unit fc) c $0.0534 c € 0.0412


Put option premium (per unit fc) p $0.0643 p € 0.0342
(European pricing)

Call option premium (%) c 4.28% c 5.15%


Put option premium (%) p 5.15% p 4.27%

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 8.22 U.S. Dollar/Japanese Yen

Pricing Currency Options on the Japanese yen


A Japanese firm wishing to buy A U.S.-based firm wishing to buy
or sell dollars (the foreign currency) or sell yen (the foreign currency)

Variable Value Variable Value


Spot rate (domestic/foreign) S0 JPY 105.64 S0 $0.0095
Strike rate (domestic/foreign) X JPY 100.00 X $0.0100
Domestic interest rate (% p.a.) rd 0.089% rd 1.453%
Foreign interest rate (% p.a.) rf 1.453% rf 0.089%
Time (years, 365 days) T 1.000 T 1.000
Days equivalent 365.00 365.00
Volatility (% p.a.) s 12.000% s 12.000%

Call option premium (per unit fc) c JPY 7.27 c $0.0003


Put option premium (per unit fc) p JPY 3.06 p $0.0007
(European pricing)

Call option premium (%) c 6.88% c 3.06%


Put option premium (%) p 2.90% p 7.27%

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$) JPY 3.06


Notional principal (US$) $750,000
Total cost (JPY) JPY 2,297,243
Problem 8.23 Euro/Japanese Yen

Pricing Currency Options on the Euro/Yen Crossrate


A Japanese firm wishing to buy A European firm wishing to buy
or sell euros (the foreign currency) or sell yen (the foreign currency)

Variable Value Variable Value


Spot rate (domestic/foreign) S0 JPY 133.89 S0 € 0.0072
Strike rate (domestic/foreign) X JPY 136.00 X € 0.0074
Domestic interest rate (% p.a.) rd 0.088% rd 2.187%
Foreign interest rate (% p.a.) rf 2.187% rf 0.088%
Time (years, 365 days) T 0.247 T 0.247
Days equivalent 90.00 90.00
Volatility (% p.a.) s 10.000% s 10.000%

Call option premium (per unit fc) c JPY 1.50 c € 0.0001


Put option premium (per unit fc) p JPY 4.30 p € 0.0002
(European pricing)

Call option premium (%) c 1.12% c 1.30%


Put option premium (%) p 3.21% p 2.90%

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) € 0.0002


Notional principal (JPY) JPY 10,400,000
Total cost (euro) € 2,167.90
Problem 8.24 U.S. Dollar/British Pound

Pricing Currency Options on the British pound


A U.S.-based firm wishing to buy A British firm wishing to buy
or sell pounds (the foreign currency) or sell dollars (the foreign currency)

Variable Value Variable Value


Spot rate (domestic/foreign) S0 $1.8674 S0 £0.5355
Strike rate (domestic/foreign) X $1.8000 X £0.5556
Domestic interest rate (% p.a.) rd 1.453% rd 4.525%
Foreign interest rate (% p.a.) rf 4.525% rf 1.453%
Time (years, 365 days) T 0.493 T 0.493
Days equivalent 180.00 180.00
Volatility (% p.a.) s 9.400% s 9.400%

Call option premium (per unit fc) c $0.0696 c £0.0091


Put option premium (per unit fc) p $0.0306 p £0.0207
(European pricing)

Call option premium (%) c 3.73% c 1.70%


Put option premium (%) p 1.64% p 3.87%

Call option premiums for a U.S.-based firm buying call options on the British pound:

180-day maturity ($/pound) $0.0696


90-day maturity ($/pound) $0.0669
Difference ($/pound) $0.0027

The maturity doubled while the option premium rose only about 4%.
Problem 8.25 Euro/British Pound

Pricing Currency Options on the British pound/Euro Crossrate


A European firm wishing to buy A British firm wishing to buy
or sell pounds (the foreign currency) or sell euros (the foreign currency)

Variable Value Variable Value


Spot rate (domestic/foreign) S0 € 1.4730 S0 £0.6789
Strike rate (domestic/foreign) X € 1.5000 X £0.6667
Domestic interest rate (% p.a.) rd 4.000% rd 4.160%
Foreign interest rate (% p.a.) rf 4.160% rf 4.000%
Time (years, 365 days) T 0.247 T 0.247
Days equivalent 90.00 90.00
Volatility (% p.a.) s 11.400% s 11.400%

Call option premium (per unit fc) c € 0.0213 c £0.0220


Put option premium (per unit fc) p € 0.0487 p £0.0097
(European pricing)

Call option premium (%) c 1.45% c 3.24%


Put option premium (%) p 3.30% p 1.42%

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% € 0.0213


Call option on pounds when euro interest is 2.072% € 0.0189
Change, an increase in the premium € 0.0213