Problem 8.

1 Peregrine Funds -- Jakarta

Samuel Samosir trades currencies for Peregrine Funds in Jakarta. He focuses nearly all of his time and attention on the U.S.
dollar/Singapore dollar ($/S$) cross-rate. The current spot rate is $0.6000/S$. After considerable study, he has concluded
that the Singapore dollar will appreciate versus the U.S. dollar in the coming 90 days, probably to about $0.7000/S$. He has
the following optons on the Singapore dollar to choose from:

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 Samuel buy a put on Singapore dollars or a call on Singapore dollars?

Since Samuel expects the Singapore dollar to appreciate versus the US dollar, he should buy a call on Singapore dollars.
This gives him 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 his expectation of the future spot rate proves correct.)

b Using your answer to part (a), what is Samuel's breakeven price?

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) Using your answer to part (a), what is Samuel's gross profit and net profit (including premium) if the spot rate at
the end of 90 days is indeed $0.70/S$?
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) Using your answer to part (a), what is Samuel's gross profit and net profit (including premium) if the spot rate at
the end of 90 days 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 8.2 Paulo's Puts
Paulo writes a put option on Japanese yen with a strike price of $0.008000/¥ (¥125.00/$) at a premium of 0.0080 cents per yen and with an expiration date six month from
now. The option is for ¥12,500,000. What is Paulo'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 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 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?

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 8.4 Black River Investments

Jennifer Magnussen, a currency trader for Chicago-based Black River Investments, uses the following futures quotes on the British pound to speculate on the value of
the British 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 Jennifer buys 5 June pound futures, and the spot rate at maturity is $1.3980/pound, what is the value of her position?
b) If Jennifer sells 12 March pound futures, and the spot rate at maturity is $1.4560/pound, what is the value of her position?
c) If Jennifer buys 3 March pound futures, and the spot rate at maturity is $1.4560/pound, what is the value of her position?
d) If Jennifer sells 12 June pound futures, and the spot rate at maturity is $1.3980/pound, 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 he 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 futures: Jennifer 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: Jennifer 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 8.5 Madera Capital

Katya Berezovsky works is a currency speculator for madera 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:

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?

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

b) Using your answer to part (a), what is Katya's break even price?
Katya buys a put on yen. Pays premium today.
In 90 days, exercises the put, receiving US$.
in ¥/$
Strike price $0.00800 125.00
Less premium -$0.00003
Breakeven $0.00797 125.47

c) Using your answer to part (a), what is Katya's gross profit and net profit if the end spot rate is ¥140/$?

Gross profit Net profit

(US$/¥) (US$/¥)
Strike price $0.00800 $0.00800
Less spot rate -$0.00714 -$0.00714
Less premium -$0.00003
Profit $0.00086 $0.00083