fbe436 hw4 solution

0764 00870 note an on the money option has an

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Unformatted text preview: rowing rate $ deposit rate Call (Sept –on the money) Put (Sept –on the money) 1.1800 1.1697 1.1703 4.80% 4.60% 2.90% 2.75% $0.0764 $0.0870 Note: An “on the money” option has an exercise price at the current FX rate. The face value of an option is ½ that of the corresponding futures contract. Delta expects the $/€ rate to be 1.17 in 6 months. (a) What should Delta do in order to hedge this position, (i) using the forward market, (ii) using the futures market, (iii) using a money market hedge, (iv) using options? (i) & (ii) Sell Euros forward or futures (400 futures contracts). Note that the Futures and the Forwards do not expire at the same time! (iii) Borrow Euros now and deposit the proceeds in $s. (iv) Purchase Euro Puts (800 contracts). (b) Suppose in 6 months the $/€ became 1.1900 $/€. What did the ex-post hedging costs turn out to be? (i) Forward: (1.1697 – 1.1900) = -$1,015,000. (ii) Futures: (1.1703 – 1.1900) = -$ 985,000 (iii) MM: (1.1682 – 1.1900) = -$1,090,000 1.1682 i...
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This note was uploaded on 01/16/2010 for the course FBE 436 at USC.

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