(Ch. 5) Selling Currency Call Options. Juan Bulsara sold a call option in Australian dollars (AUD) for USD .04 as a premium per unit. The strike price was USD .70 (the exchange rate we use is AUDUSD), and the spot rate at the time the option was exercised was USD .67. Assume Mr. Bulsara did not obtain AUD until the option was exercised. Also, assume that there are 50,000 units in an AUD option. What was Mr. Bulsara’s net profit on the call option? (5 points) 2. (Ch. 5) Selling Currency Put Options. Brian Soto sold a put option on AUD for the premium at USD .05 per unit. The strike price was USD .73 (the exchange rate we use is AUDUSD), and the spot rate at the time the option was exercised was USD .67. Assume Brian immediately sold off the AUD received if the option was exercised. Also, assume that there are 50,000 units in an AUD option. What was Brian’s net profit on the put option? (5 points) 3. (Ch. 5) Speculating with Currency Put Options. Queen Co. has purchased AUD options for speculative purposes. Each option was purchased for a premium of USD .03 per unit, with an exercise price of USD .68 per unit. (the exchange rate we use is AUDUSD.) Queen Co. will purchase the AUD just before it exercises the options (if it is feasible to exercise the options). It plans to wait until the expiration date before deciding whether to exercise the options. In the following table, fill in the net profit (or loss) per unit to Queen Co. based on the listed possible spot rates of the AUD on the expiration date. (each row: 3 points with a total of 18 points) Possible S t (AUDUSD) Whether the option Net Profit (Loss) per Unit on Expiration Date is exercised? (Y or N) if Spot Rate Occurs .64 .66 .68 .70 .72 .73 4. (Ch. 5) Hedging With Put Options. As treasurer of Killam Corp. (a U.S. exporter to Australia), you must decide how to hedge (if at all) future receivables of AUD 2,000,000 (AUD: Australian dollar) after 90 days from now. Put options are available for a premium of USD .02 per unit and an exercise price of .76 AUDUSD. The forecasted AUDUSD spot rate in 90 days follows: Future Spot Rate (AUDUSD) Probability .77 30% .73 45 .70 25 Given that you hedge your position with the put options (to buy or to sell?) (5 points), create a probability distribution for USD to be received in 90 days. Assume that there are no opportunity costs for hedging by the options. What is the minimum cash flow in the USD considering both the underlying and hedging positions? (25 points) 5. (Ch. 5) Hedging Payables by Currency Options. Kiwi Corp. has future payables of NZD 3,000,000 (NZD: New Zealand dollar) in one year and wants to BUY NZDUSD currency options to hedge this position. Use any of the following information to make the decision. Assume that there are no opportunity 3 costs for hedging by the options. Verify your answer by determining the estimate (or probability distribution) of the expected dollar amount to be paid in one year hedge by options. St (NZDUSD) = .62 One-year call option: Exercise price = .59 NZDUSD; premium = USD .04 One-year put option: Exercise price = .64 NZDUSD; premium = USD .03 Rate Probability Forecasted St (NZDUSD) .65 10% .62 60% .57 30% Questions: a. What is Kiwi Corp.’s hedging position? (to buy a NZDUSD call or put options) (5 points) b. What is the amount of premium? Does Kiwi Corp. pay or receive this premium, and when? (5 points) c. What are the possible outcomes and the distribution of these outcomes? [HINT: to determine under each outcome whether the options are exercised and the total USD amount paid or received. Moreover, to calculate the expected total USD amount to be paid or received considering probabilities of the outcomes.] (25 points) 6. (Ch. 18) Value of a Swap. The annualized Indian rupee (INR) interest rate is 10% for six months, while the annualized USD interest rate is 3% for six months. Khaledi Co., a U.S. firm, entered into a currency swap with a swap dealer, where Khaledi Co. receives 6.4% semi-annually in USD and pays 14.0% semi-annually in INR. [Note: the interest rates to be represented are all annualized.] The principals in the two currencies are USD 1.25 million and INR 100 million. Notional principals are exchanged at the end of the swap. The swap will last for another two years. The exchange rate for USDINR is 80. For simplicity, assume the term structures in India and in the U.S. are flat. A. Draw a diagram showing the semi-annual swap cash flows (in INR and in USD). (5 points) B. Value this currency swap, denominated in USD, for Khaledi Co. (12 points)