Sowers

International Finance
Homework #4
Due Monday, October 3
14 points
Futures and Options
1.

Explain the difference between foreign currency options and futures and
when either might be used most appropriately (2points).

2. Steve Smith trades currencies in Hong Kong. His main responsibility is to

manage the dollar/Singapore $ ($/S$) trading desk. Suppose that the current
spot rate is $.60/S$. Steven believes that the Singapore dollar is about to
appreciate against the US dollar in the next 90 days. He expects the rate to
move to $.70/S$. (4 points)
The following options are available:
Option

Exercise Price

Premium

Put on S$

$.65/S$

$0.00003/S$

Call on S$

$.65/S$

$0.00046/S$

One option contract contains S$10,000.

a. In your estimation, should Steve buy a call or a put given his
expectations?
b. Given your choice in a), graph the payoff diagram and identify the
breakeven price.
c. Calculate Stevens profit if the spot rate in 90 days is .60, .65, .70, .75, .
80.

3. Jillian Mayfield, a currency trader in Chicago, uses the following quotes to

speculate on the British pound in the futures market (4 points).
The contract size is 62,500 pounds.
Maturity

Open

High

Low

Settle Change Open Interest

March 1.4246 1.4268 1.4214 1.4228

.0032

25,605

June 1.4164 1.4188 1.4146 1.4162

.0030

809

a. If Jillian buys 5 June pound futures, and the spot rate at maturity is
$1.398/, what is the value of her position?
b. If Jillian sells 12 March pound futures, and the spot rate at maturity is
$1.456/, what is the value of her position?
c. If Jillian buys 3 March pound futures, and the spot rate at maturity is
$1.456/, what is the value of her position?
d. If Jillian sells 12 June pound futures, and the spot rate at maturity is
$1.398/, what is the value of her position?

4. Answer the following (4 points):

a. You read that exchange-traded American call options on euros having a
strike price of 1.46 and a maturing of next March are now quoted at 3.67.
What does this mean if you are a potential buyer?
b. What happens to the premium you paid for the option in a) if you let the
option expire unexercised? What happens to the premium if you decide to
exercise the option?
c. You have the same information as in a), expect the option is a European
option. What is different?
d. Why would anyone write an option knowing that the gain from receiving
the option premium is fixed but the loss if the underlying price goes in the
wrong direction can be very large?