# FIn as 2 - Barsha Shrestha Assignment 2 FIN 446 20th Jan...

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Barsha Shrestha Assignment 2 FIN 446 20 th Jan, 2010 Chapter 5: Question 25: Estimating profits from currency futures and options; One year ago, you sold a put option on 100,000 Euros with an expiration date of one year. You received a premium on the put option of \$.04 per unit. The exercise price was \$1.22. Assume that one year ago forward rate exhibited a discount of 2 percent, and the one year futures price was the same as the one year forward rate. From one year ago to today the euro depreciated against the dollar by 4 percent. Today the put option will be exercised ( if it is feasible for the buyer to do so). a. Determine the total dollar amount of your profit or loss from your position in the put option. The spot rate will depreciated from \$1.20 to \$1.152. the loss on the put option per unit is \$1.152-\$1.22+\$.04=-\$.028 Total loss=\$.028X100,000=\$2800 b. Now assume that instead of taking a position in the put option one year ago, you sold a futures contract on 100,000 Euros with a settlement dates of one year. Determine the total dollar amount of your profit or loss. The forward rate on yr ago was equal to 1.20 x (1-.02)=1.176. The future rate is 1.176 you would gain per unit is 1.176-1.152=.024

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Total gain .024x100,000=2400 Chapter 6: Question 13: Effects of indirect intervention; suppose that the government of Chile reduces one of its key interest rates. The values of several other Latin American currencies are expected to change substantially against the Chilean peso in response to the news. a. Explain why other Latin American currencies could be affected by cut in Chile’s interest rates. Exchange rate is partially driven by relative interest rates of the countries of concern. When Chile’s interest rate decline, there will be small flow of funds to exchanged into
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FIn as 2 - Barsha Shrestha Assignment 2 FIN 446 20th Jan...

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