international fin mgt ch 5

international fin mgt ch 5 - Chapter 5 4 Forward Premium...

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Chapter 5 4. Forward Premium. Compute the forward discount or premium for the Mexican peso whose 90- day forward rate is $.102 and spot rate is $.10. State whether your answer is a discount or premium. ANSWER: (F - S) / S =($.098 - $.10) / $.10 × (360/90) = –.02, or –2%, which reflects a 8% discount 5. Effects of a Forward Contract. How can a forward contract backfire? ANSWER: If the spot rate of the foreign currency at the time of the transaction is worth less than the forward rate that was negotiated, or is worth more than the forward rate that was negotiated, the forward contract has backfired. 10. Speculating with Currency Call Options. Randy Rudecki purchased a call option on British pounds for $.02 per unit. The strike price was $1.45 and the spot rate at the time the option was exercised was $1.46. Assume there are 31,250 units in a British pound option. What was Randy’s net profit on this option? ANSWER: Profit per unit on exercising the option = $.01 Premium paid per unit = $.02 Net profit per unit = –$.01 Net profit per option = 31,250 units × (–$.01)
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international fin mgt ch 5 - Chapter 5 4 Forward Premium...

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