Finance International Problems: 1 Exchange Rates: 1. Indicate whether the following quotations are in American or European Terms, indicate the currency the bank is offering buy/sell, and indicate how much the bank will make for each dollar ($) simultaneously bought and sold: Bid Offer a. 10P/$ 11P/$ b. 110/$ 105/$ c. .65$/CD .68$/CD d. .44$/SD .40$/SD e. 8000Rp/$ 8200Rp/$ Answers: a. European Terms, $ b. European Terms, c. American Terms, CD d. American Terms, $ e. European Terms, $ 1 Peso 5 Yen .0678Canadian Dollars .2272Singapore Dollars 200Rupia
2. Compute the Cross Exchange-Rate given the following currency mid-quotes (ignore transactions costs and bid-ask spread): a. 110/$ and .98/$ b. 8200Rp/$ and 110/$ c. 10P/$ and .65$/CD d. 1.55$/ and .98/$ Answers: a. 110Y / $ .98E / $ = 112.24/ b. 8200 Rp / $ 110Y / $ = 74.54Rp/ c. 10 P / $ .65$ / CD = 6.5P/CD d. 1.55$ / L .98 E / $ = 1.519/ 3. Compute the Cross Exchange-Rate given the following Bid-Ask Spreads: Bid Offer Bid Offer a. 11P/$ 10P/$ 110/$ 105/$ b. .65$/CD .68$/CD 8000Rp/$ 8200Rp/$ Answers: a. In this example, the bank will buy and sell the numerator currency at the respective Bid and Offer. Thus, the bank will buy Pesos and sell Yen at the following rate: 105Y / $ 11 p / $ = 9.545/P The bank will sell Pesos and buy Yen at: 110Y / $ 10 p / $ = 11/P The Bid and Offer for the Peso is: Bid 9.545/P Offer 11/P b. The bank will buy and sell the denominator currency at the bid and offer. Thus, the bank will sell CD and buy Rp for: 8200 Rp / $ .68$ / CD = 5576Rp/CD Likewise, it will sell Rp and buy CD: 8000 Rp / $ .65$ / CD = 5200Rp/CD The Bid and Offer for the Rp is: Bid 5576Rp/CD Offer 5200Rp/CD
International Finance Problems: 1
4. Determine whether triangular arbitrage exists, and what you need to do to capture dollar profits. (Ignore the Bid-Offer and transactions costs) a. 110/$, 10P/$, and 11/P b. 107/$, 10P/$, and 11/P c. .5$/SD, 10P/$, and 4P/SD d. 1.5$/L, .97E/$, and 1.49E/L Answers: 1 1 $ / P P / Y = 1 ; no arbitrage exists 10 11 1 1 b. 107Y / $ $ / P P / Y < 1 ; one of the exchange rates will increase: Y/$, $/P, 10 11 P/Y. Borrow a dollar, buy 10 Pesos, convert to 110 Yen, and convert the 110 Yen to $1.028 at the rate of 107Y/$. You profit $.028 for every dollar transacted. a. 110Y / $ c. .5$ / SD 10 P / $ .25SD / P > 1 ; Borrow a dollar, buy 10 Pesos, convert to 2.5SD, and convert that to $1.25. Make a $.25 profit on each dollar transacted. d. 1.5$ / L .97 E / $ .6711L / E < 1 ; Since the dollar will depreciate against the pound, borrow $1.5, buy 1, convert to 1.49 Euro, and convert that to $1.536, using a rate of .97E/$. Make a profit of $.036 on each $1.50 transacted. Note: The key to solving this problem is to recognize that when the product is less than one, (at least) one of the bilateral rates will increase (the currency in the numerator will depreciate against the currency in the denominator). When the product is greater than one, the rates will decrease (the currency in the numerator will depreciate against the currency in the denominator). Note also that you have to orient the exchange rates so that units cancel. In problem b: the dollar is expected to depreciate against the Peso. Since you need to start in dollars to finish in dollars, the dollar-peso exchange is where you start. (The dollar is expected to appreciate against the yen, so you would lose money by selling dollars for Yen.) In problem c, the rates will increase. Hence, the dollar is expected to decrease (appreciate) against the Peso, and depreciate against the Singapore dollar. Hence, you make money by selling dollars and buying the Peso. 5. Determine whether Triangular Arbitrage exists and the trades you would execute to capture dollar profits, given the following Bid-Offer Quotes. Bid Offer 1.5$/L 1.55$/L 1.05 E/$ .98 E/$ 1.42 E/L 1.47E/L (This problem is a little tricky; I'll save it for my next class.)
International Finance Problems: 1 Forwards: 1. Draw the Payoff diagram for a long and short forward position on the Peso with a forward rate of 10P/$. Also, if you buy 1,000,000 Peso forward (a long position in the Peso) at the forward rate, what is your profit or loss if at maturity, the Peso is 9.2P/$? 11.2P/$? Answer: Long--agreed to buy the Peso Short--agreed to sell the Peso
Appreciation 9 10 11
Depreciation P/$ 9 10 11 P/$
If you agree to buy the peso forward (at the fixed price of 10P/$) you profit by the exact percentage with which the peso appreciates, and take losses in the exact percentage with which Peso depreciates. In the short position, it is exactly the opposite. At 9.2P/$, our contract is worth $108,695.65. Since we have agreed to 10P/$ or $100,000, we profit by $8,695.65. At, 11.2 P/$, our contract is worth $89,285.71, we lose $10,714.29. 2. Compute the Forward Premium given the following, and indicate whether the dollar is expected to appreciate or depreciate: Spot Forward Maturity a. 10P/$ 11P/$ 180 days b. $.5852/SFr $.5951$/SFr 30 days c. 110Y/$ 105.5Y/$ 91 days Answers: 11P / $ - 10 P / $ = 10% ; Appreciate a. 10 P / $ $.5951 / SFr - .5852 / SFr = 1.69% ; Appreciate b. $.5852 / SFr 105.5Y / $ - 110Y / $ = -4.091% ; Depreciate c. 110Y / $
International Finance Problems: 1 3. Explain how to hedge the following transactions with forward contracts. The spot is 8000Rp/$, the forward is 8200Rp/$ are: a. You are buying 100,000 barrels of oil from Indonesia three months from now, and have agreed to a contract price of 152,000Rp per barrel. You have a buyer that has agreed to pay you $20 per barrel plus deliver costs. Can you making a profit and how can you eliminate risk using forwards? b. You have agreed to sell 10,000 computers to the Indonesian Government three months from now at a contract price of 6,400,000Rp per computer. Your supplier in the US is charging you $750 per computer. Can you make a profit and how do eliminate your risk using forwards? c. Suppose instead that your supplier is in Mexico, and is charging 7,900 Pesos for each computer, the Peso spot and forward are 10.0P/$ and 10.2P/$, respectively. How do you hedge the transaction? Answers: a. Use the forward rate for determining profits, not the spot, since you must pay at that time. 152,000 Rp 8200 Rp / $ = $18.5 per barrel, you are profiting $1.50 on each barrel that you sell. Since you owe Rupee (and therefore, must deliver Rupee), you buy 1.52 Billion Rupee forward to lock in your profits. b. The translate price of a computer is 64,000 8200 = 780.49. Since your computer cost is $750, you will make roughly $30 on each computer delivered. The government will pay you 64 Billion Rupee in three months. Since you will be receiving Rupee, you sell 64 Billion Rupee forward. c. At 7,900 Pesos, each computer will cost 7900 10.2 = $774.51; on 10,000 computers, you will make a $59,800 profit. Since your profit margin is extremely thin--$5.98 per computer--you purchase 79 Million Pesos forward to fix the dollar cost of the computer. (Note: you would also conduct the hedge in part b.) 4. Compute the Forward Rates using the following Spot and risk-free rates: a. 10P/$, rP = 12%, r$ = 4% b. 8000Rp/$, rRp = 18%, r$ = 4% Answers: a. FP / $ = 10 P / $ 1..12 = 10.7692 P / $ 1 04 1 FP / $ = 8000 Rp / $ 1..18 = 9,076.92 Rp / $ b. 04 5. Suppose the 1 year forward on the Peso is 11P/$, the spot is 10P/$, the Mexican risk-free rate is 12.6%, the US risk-free rate is 4%. Can you earn arbitrage? Yes. The forward should be: FP / $ = 10 P / $ (1.126 1.04 ) = 10.83P / $ Since the Peso forward is cheap at 11P/$, we buy the Peso forward. To earn arbitrage, we borrow 1000 Pesos at 12.6%, exchange for 100 dollars, and invest at 4%. In one year, we owe, 1126 Pesos, we have 104$ that we exchange at 11P/ $, yielding 1144 Pesos. Our profit after paying off the debt is 18 Pesos.
International Finance Problems: 1 6. Suppose that the spot for the Indonesian Rupiah is 9500 Rp/$, the 3-month forward is 9800 Rp/$, the 1-year eurodollar rate is 5%, and the 1-year riskfree rate on the Rupiah (risk-free if there is one) is 18%. Is there a way in which you can "ostensibly" earn arbitrage? (Assume that you can borrow and lend at the above rates.) Now assume that you can lend (invest at the above rates), but must borrow at 6% and 19%, can you earn arbitrage profits? How about if the forward is 9550 Rp/$? The quarterly rates of interest are: r$ = (1.05) 4 - 1 = .01227
1
rRp (1.18) 4 - 1 = .04225
1
1 04225 Hence the Forward "should be": F = 9500 1..01227 = 9781.3 Rp $ The Rupee forward is cheap. - Borrow 950,000 Rupiah for 3 months, exchange for $100 and invest at the US interest rate. Sell the dollar forward at 9800. - In 3 months, you owe 990,134 Rp; you have $101.23. You exchange into Rp at the agreed on forward rate of 9800 Rp/$, yielding 992,026 Rp. Payoff the loan and Pocket 1,852Rp.
Now assume that you can lend@ 5% and borrow@ 6% in the US, or lend@ 18% and borrow@ 19% in Indonesia. Can you make money? - You would borrow 950,000 Rp@ 19% (a quarterly rate of 4.445%) and invest in the US@5%. - You would owe 950,000*1.04445 = 992,225Rp. - Since your US investment yields 992,026 Rp after exchanging at the forward rate, you cannot payoff the loan--you will not conduct this transaction. - Note: We already determined that the transaction will not work in reverse. How about if F = 9550Rp/$? This is well below the Forward rate of 9800 let's try it. (This is the transaction in the reverse direction.) - Borrow $100 in the US@ 6% (a quarterly rate of 1.467%) - Exchange into Rp and invest@ 18% for a quarter, sell the Rp forward at 9550/$. - In 3 months, you have 950,000Rp*1.04225 = 990,134Rp which at 9550Rp/$ is $101.67. You owe $101.47. You make a $.20 profit on every $100 exchanged. This works. 7. Determine the Real Interest Rate if the Nominal Rate of interest is 7% and the inflation rate is 3%. 1.07 - 1 = .03884 1.03 An approximation is .07 - .03 = .04 RER =
International Finance Problems: 1 Futures: 1. Suppose that that today is January 2, and you enter into a naked long position on one June 19 Yen futures contract, for a contract price of .00990$/ Y. Indicate your profit or loss if you close the contract on the following dates with the corresponding futures prices? Indicate from the observed price whether this is consistent with an expected (or realized) appreciation or depreciation of the Yen. Each contract controls 12,500,000 Yen. a. January 9, .00991$/Y (101.000Y/$) b. March 2, .01002$/Y (99.800Y/$) c. June 2, .00963$/Y (103.842Y/$) d. Hold to maturity, and the spot is .00980$/Y (102.000Y/$) a . b . c. d . Jan 2 .00990 .00990 .00990 .00990 Close .00991 .01002 .00963 .00980 Gain/Loss ($/Y) +.00001 +.00012 - .00027 - .00010 Gain/Loss ($) + 125 +1,500 - 3,375 - 1,250 Appreciation Appreciation Depreciation Depreciation
Remember: the futures price always converges to the spot on maturity, because the futures contract delivers a specified quantity of foreign currency (in this case, 12,500,000 Yen). The price must therefore equal the spot. If the price was below the spot on maturity, you could conduct arbitrage by buying Yen futures, and selling an equal amount of Yen at the spot exchange rate. If it was above the spot, you would earn arbitrage profits by conducting the reverse transaction. 2. Repeat Problem 1 assuming that you enter in to a short position on ten Yen contract--you sell ten Yen contracts. a. January 9, .00991$/Y (101.000Y/$) b. March 2, .01002$/Y (99.800Y/$) c. June 2, .00963$/Y (103.842Y/$) d. Hold to maturity, and the spot is .00980$/Y (102.000Y/$) a . b . c. d . Jan 2 .00990 .00990 .00990 .00990 Close .00991 .01002 .00963 .00980 Gain/Loss ($/Y) - .00001 - .00012 +.00027 +.00010 Gain/Loss ($) - 1,250 - 15,000 +33,750 +12,500 Appreciation Appreciation Depreciation Depreciation
International Finance Problems: 1 Like forward contracts, the gain of a long position is the loss to the short position. These are just opposite sides to the same contract. Also, remember that the gains or losses are paid over time.
International Finance Problems: 1 3. Suppose that that today is January 2, the spot and price of June 19 Yen futures contract is .00982$/Y and .00990$/Y, respectively. Assume that you have a Yen obligation of 25,000,000 Yen due June 6 that you wish to hedge. Indicate the gains or losses on the hedge for corresponding spot and futures prices. Assume that each contract controls 12,500,000 Yen, and that the June 6 forward on the Yen is .00989$/Y. a. Spot: .00990, future: .00991 b. Spot: .01000, future: .01002 c. Spot: .00965, future: .00963 Answer: Since you owe 25,000,000 Yen, you will hedge the obligation by agreeing to buy Yen (a long position) with two futures contracts, and close the position on June 6. Because the number of contracts evenly divides the amount to be hedged, you will hedge the exact amount (you will not be over or under-hedged). a. Spot Jun 6 Forward Jun 19 Future Net Gain/Loss Jan 2 ($/Y) .00989 .00990 Jun 6 ($/Y) .00990 .00991 Gains/Losses ($/Y) - .00001 + .00001 .00000 Gain/Loss ($) - 250 + 250 0
This hedge works perfectly as the increase in futures price exactly offsets the appreciation of the spot. (The spot rate was expected to be .00989$/Y on June 6--the forward rate--however, .00990$/Y was realized; an appreciation of the Yen.) b. Spot Jun 6 Forward Jun 19 Future Net Gain/Loss Jan 2 ($/Y) .00989 .00990 Jun 6 ($/Y) .01000 .01002 Gains/Losses ($/Y) - .00011 + .00012 + .00001 Gain/Loss ($) - 2,750 + + 3,000 250
In this case, the appreciation of the Yen results the obligation costing $2,750 more than expected on June 6. However, the futures price has risen by nearly the same amount as the spot (actually a little more). As a result, the profit on the futures contract more than offsets the additional cost of the obligation due to the unexpected appreciation of the spot. c. Spot Jun 6 Forward Jun 19 Future Net Gain/Loss Jan 2 ($/Y) .00989 .00990 Jun 6 ($/Y) .00965 .00963 Gains/Losses ($/Y) + .00024 - .00027 - .00003 Gain/Loss ($) + 6,000 6,750 750
The spot depreciated substantially. You would have gained if you had not hedged--the 25,000,000 Yen that you owed would have cost less in dollar terms than was expected. However, you hedged, moreover, the futures price fell somewhat more than the spot.
International Finance Problems: 1 4. Repeat Question 3 assuming that instead of having a Yen obligation, you are anticipating 75,000,000 in Yen revenues June 6. Answer: The problem is quite similar except that you are receiving Yen as opposed to paying Yen, and that quantity is three times that of question three. You hedge the position by selling six June 19 Yen futures contracts, and will close the position June 6. Again, you are hedging the exact amount. a. Spot Jun 6 Forward Jun 19 Future Net Gain/Loss Jan 2 ($/Y) .00989 .00990 Jun 6 .00990 ($/Y) .00991 Gains/Losses ($/Y) + .00001 - .00001 .00000 Gain/Loss ($) + 750 750 0
Again the hedge is perfect. The slight appreciation of the spot would have benefited you --the Yen revenues would have been worth more--but you were concerned about a depreciation of the Yen, and hedged by selling futures. b. Spot Jun 6 Forward Jun 19 Future Net Gain/Loss Jan 2 ($/Y) .00989 .00990 Jun 6 ($/Y) .01000 .01002 Gains/Losses ($/Y) + .00011 - .00012 - .00001 Gain/Loss ($) + 8,250 9,000 750
Note: .00001 6 12,500,000 = 750 Also note that because you are receiving Yen, and therefore selling futures, that your gains/losses are opposite to that of Question 3. Also, note that because you are hedging three times the amount, your dollar gains and losses are three times (in absolute magnitude) that of Question 3. c. Spot Jun 6 Forward Jun 19 Future Net Gain/Loss Jan 2 ($/Y) .00989 .00990 Jun 6 ($/Y) .00965 .00963 Gains/Losses ($/Y) - .00024 + .00027 + .00003 Gain/Loss ($) - 18,000 + + 20,250 2,250
Note: .00003 6 12,500,000 = 2,250
International Finance Problems: 1 5. Repeat Question 3 assuming that instead of having a Yen obligation, you are anticipating 80,000,000 in Yen revenues June 6. Answer: Now you have a mismatch between the amount needed to be hedged, and the amount that can be hedged. If you sell six contracts, you hedge only 75,000,000 Yen, and will be under-hedged by 5,000,000 Yen. If you sell seven contracts (87,500,000 Yen), you will be over-hedged by 7,500,000 Yen (this is like taking a naked short position on 7,500,000 Yen). Since you wish to minimize your exposure, you sell six contracts. a. Spot Jun 6 Forward Jun 19 Future Net Gain/Loss Jan 2 ($/Y) .00989 .00990 Jun 6 ($/Y) .00990 .00991 Gains/Losses ($/Y) + .00001 - .00001 .00000 Gain/Loss ($) + 800 750 50
Now the hedge is close, but imperfect because of the mismatch between revenues and amount hedged. Also note that you can no longer multiply the net gain/loss in $/Y by the amount hedged and compute the net gain or loss. This is because the amount hedged (75,000,000Y) differs from the amount needed to be hedged (80,000,000). b. Spot Jun 6 Forward Jun 19 Future Net Gain/Loss Jan 2 ($/Y) .00989 .00990 Jun 6 ($/Y) .01000 .01002 Gains/Losses ($/Y) + .00011 - .00012 - .00001 Gain/Loss ($) + 8,800 9,000 200
Note: .00011 80,000,000 = 8,800 .00012 6 12,500,000 = 9,000 c. Spot Jun 6 Forward Jun 19 Future Net Gain/Loss Jan 2 ($/Y) .00989 .00990 Jun 6 ($/Y) .00965 .00963 Gains/Losses ($/Y) - .00024 + .00027 + .00003 Gain/Loss ($) - 19,200 + + 20,250 1,050
Note: .00024 80,000,000 = 19,200 .00027 6 12,500,000 = 20,250 The loss on the spot is obviously due to the unexpected depreciation of the Yen below the forward rate. On January 2, it was expected that the June 6 price of the Yen would . 00989, however, .00965 was realized. This represented a loss of $19,200 in translated revenues. However, the gain from selling six June 19 Yen futures contracts more than offset the losses.
International Finance Problems: 1 6. Its August 1, the December 20 futures price for the Peso is .09615$/P. On November 1 the contract prices is .09625$/P, and the spot is .09775$/P. A month later, December 20, the spot is .09579$/P. Each contract controls 500,000 Pesos. a. If you assume the long position on 5 contracts, how much have you profited or lost if you hold the contract to maturity? b. If you're in the long position on 5 contracts and close the contracts on November 1, how much have you profited or lost? c. How about if your in the short position, and you close the contract on November 1? Answers: a. You have agreed to buy pesos for .09615$/P (10.40P/$) on December 20, the spot rate is .09579$/P (10.44P/$), your loss is .00036$/P, or $900 on the five contracts. b. On November 1, the futures price is .09625$/P (10.39P/$); since you agreed to buy at .09615$/P, you would have gained .00010$/P on each contract, or $250 by closing the five contracts early. c. If instead, you had sold the contract, you would have lost $250. (Technically, to close a position early, you take the opposite position--a long position another contract with the same maturity, thus canceling out the short.) 7. Suppose that the spot on the Singapore Dollar is 1.71SD/$, the 1-year futures price is 1.65SD/$, the US risk-free rate is 5% and the Singapore risk-free rate is 4%. Is there an arbitrage opportunity? The theoretical forward is: FSP / $ = 1.71SD / $ 1.04 1.05 = 1.6937 SD / $ The future appears over-priced, so you would sell SD futures. Simultaneously, you would borrow 100 dollars, convert to SD and invest. In one year, you would owe $105 and you would have 177.84SD (or $107.78 after exchanging at the forward rate). Your profit would $2.78 on each $100 transacted. Note: This is technically not risk-free since you have some risk of large adverse movements of the future price in the interim that would result in cash outflows. Because the outflows would have a greater time-value than the gain that must occur on maturity, this winning transaction could turn into a losing transaction.
International Finance Problems: 1 8. Use the information in problem 6, and assume an August 1 spot of 10.00P/$, the Mexican quarterly interest rate is 3.5%, the US, 1%. What would be your losses or gains from hedging an obligation to pay 2,000,000 Pesos on: a. December 20 b. November 1 c. October 20, and the delta of your contract is 2.0 (Advanced Topic) Answers: a. You would hedge by buying 4 peso future contracts. Since you are holding to maturity, the Dec 20 futures price is a forecast of the spot (you can use the future as the forward). Aug 1 ($/P) Dec 20 ($/P) Gains/Losses ($/P) Gain/Loss ($) Spot .09579 + .00037 + 740 Dec 20 Future .09615 .09579 - .00037 - 740 Net Gain/Loss .00000 0 The hedge would be perfect and would fix the dollar value of your obligation at $192,300, or .09615$/P (10.40P/$). b. In this case, you buy 4 contracts on August 1 and sell on November 1. The November 1 forward is computed via interest rate parity: 1.035 .1000$ / P = .09759$ / P 1.01 Aug 1 ($/P) Nov 1 ($/P) Gains/Losses ($/P) Gain/Loss ($) Spot .09775 - .00016 - 320 Nov 1 Forward .09759 Dec 20 Future .09615 .09625 + .00010 + 200 Net Gain/Loss - .00006 - 120 The spot has depreciated less than expected--it was expected to fall to .09759, but fell only to .09775--a relative appreciation. As a result, you lose .00016$/P on the spot; the 2,000,000 pesos you owe will cost $320 more than anticipated. However, you realize a gain of .00010$/P, or $200, on the four future contracts, partly offsetting your loss. The hedge was imperfect because the futures price did not move perfectly with the deviation of the spot from the forward rate. Remember, when you close the contract early, you receive your gains or pay your losses, then pay the obligation at the prevailing spot. c. You would hedge with 2 2,000,000 P in futures contracts (8 contracts). Aug 1 ($/P) Nov 1 ($/P) Gains/Losses ($/P) Gain/Loss ($) Spot .09775 - .00016 - 320 Nov 1 Forward .09759 Dec 20 Future .09615 .09625 + .00010 + 400 Net Gain/Loss - .00006 80 Note: A contract Delta of 2.0 means that the spot rate is twice as volatile as the future over the holding period (based on historical data).
International Finance Problems: 1 9. Repeat 8a, b, assuming that the obligation to be hedged is 2,300,000 Pesos. Also compute the realized exchange rate after including losses or gains from hedging. Answers: Four peso future contracts will hedge 2,000,000 Pesos; five Peso contracts will hedge 2,500,000 Pesos. Since you wish to minimize your exposure to the Peso, you use five contracts. a. Spot Dec 20 Future Net Gain/Loss Aug 1 ($/P) .09615 Dec 20 ($/P) .09579 .09579 Gains/Losses ($/P) + .00037 - .00037 .00000 Gain/Loss ($) + 851 - 925 74
The hedge is imperfect because of a mismatch between the amount hedged (2,500,000 Pesos) and the amount required to be hedged (2,300,000 Pesos). The realized exchange rate is: .09615P / $ 2,300,000 P + $74 = .09618P / $ 2,300,000 P b. Spot Nov 1 Forward Dec 20 Future Net Gain/Loss Aug 1 ($/P) .09759 .09615 Nov 1 ($/P) .09775 .09625 Gains/Losses ($/P) - .00016 + .00010 - .00006 Gain/Loss ($) - 368 + 250 - 118
The hedge is imperfect. The realized exchange rate is: .09615P / $ 2,300,000 P + $118 = .09620 P / $ 2,300,000 P 10. Assume the information provided in Question 9b. You are a Japanese businessman, and there are no Peso-Yen contracts available. However, Dec 20 futures are available on the US exchange for .01010 $/Y. The current spot (Aug 1) on the Yen is .01000 $/Y. How would you best hedge your Peso obligation? Explain how you would compute gains/losses on the hedge. Assume each Yen contract controls 12,500,000 Yen. (Advanced question.) Answer: You need to go from the Peso to the Dollar to the Yen (work the problem backwards). At futures price of .09615$/P, 2,300,000 Peso obligation translates to $221...