Revision problem for INS3032 Part 2

1. Citigroup sells a call option on euros (contract size is €500,000) at a premium of $0.04 per euro. If the exercise price is
$0.91 and the spot price of the euro at date of expiration is $0.93, what is Citigroup's profit (loss) on the call option?

2. Coca-cola will receive totaling £2.5 million next month from British customer. It can buy pound put options
with a strike price of $1.65 at a premium of 2.0 cents per pound. The spot price of the pound is currently $1.68,
and the pound is expected to trade in the range of $1.62 to $1.70. Cocacola also can take a short position in the
pound futures contract with futures price at $1.64.

a. How many options and futures contracts will Coca-Cola need to protect its payment? Each contract
size is £31,250 for options and £62,500 for futures and calculate the breakeven point (5 points)

b. Diagram Cocacola's profit and loss associated with the put option position and futures position within
its range of expected exchange rates. Ignore transaction costs and margins.( 5 points)

c. Calculate what Cocacola would gain or lose on the option within the range of expected future
exchange rates at three points: $1.63, $1.66 & $1.70.( 15 points)

3. Inflation rate in the U.S is forecasted to be lower than Vietnam’s one. How does it affect exchange rates between VND
and USD on the foreign exchange (FX)? The central bank of Vietnam (SBV) would like to maintain the previous rate.
What actions they will do?

4. Economic growth rates of the U.S is expected to be greater than Vietnam. . How does it affect exchange rates
between VND and USD on the foreign exchange (FX)? The central bank of Vietnam (SBV) would like to maintain the
previous rate. What actions they will do?

5. Will an arbitrageur facing the following prices be able to make money?

6. You have $1,000. Can you use triangular arbitrage to generate a profit? If so, explain the order of the transactions
that you would execute, and the profit that you would earn. If you can not earn a profit from triangular arbitrage,
explain why.

Bid Ask

Euro in $ 1.11 1.25

MXN Pesos in $ $.10 $.11

Euro in pesos 13 14

7. You are given these quotes by the bank:

 You can sell Canadian dollars (C$) to the bank for $.70.

You can buy Canadian dollars from the bank for $.73.

The bank is willing to buy dollars for 0.9 euros per dollar.

The bank is willing to sell dollars for 0.94 euros per dollar. .

The bank is willing to buy Canadian dollars for 0.64 euros per C$.

The bank is willing to sell Canadian dollars for 0.68 euros per C$.

You have $100,000. Estimate your profit or loss if you would attempt triangular arbitrage by converting your dollars
to euros, and then convert euros to Canadian dollars and then convert Canadian dollars to U.S. dollars.

8. Assume the following information:

U.S. investors have $1,000,000 to invest:
1-year deposit rate offered by U.S. banks = 10%
1-year deposit rate offered on Swiss francs = 13.5%
1-year forward rate of Swiss francs = $1.26
Spot rate of Swiss franc = $1.30
Given this information:
a. interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing
domestically.
b. interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is
possible domestically.
c. interest rate parity exists and covered interest arbitrage by U.S. investors results in a yield above what is possible
domestically.
d. interest rate parity doesn'-7t exist and covered interest arbitrage by U.S. investors results in a yield below what is
possible domestically.
9. Assume the following information:

You have $300,000 to invest:

The spot bid quote for the euro (€) is $1.08
The spot ask quote for the euro is $1.10
The 180-day forward rate (bid) of the euro is $1.08
The 180-day forward rate (ask) of the euro is $1.10
The 180-day interest rate in the United States is 6%
The 180-day interest rate in Europe is 8%
If you conduct covered interest arbitrage, what is your percentage return after 180 days? Is covered interest arbitrage
feasible in this situation?
a. 7.96 percent; feasible
b. 6.04 percent; feasible
c. 6.04 percent; not feasible
d. 4.07 percent; not feasible
e. 10.00 percent; feasible