Please help as soon as possible
ECON 325
Problem Set 3
1. Page 417 #2, 3, 6, 8
2. Page 458-59 #1, 2, 6, 7, 9, 11
3. A. What is meant by stabilizing speculation? What is its effect?
B. What is meant by destabilizing speculation? What is its effect?
C. How can anyone who has to place an order abroad and/or make a payment in the foreign currency speculate if he or she expects the exchange rate to vary shortly?
4. Suppose that the rate on 3-month treasury bills is (on a yearly basis) 10% in London and 6% in New York and the spot rate of the pound is $2.00.
A. How can a US investor undertake uncovered interest arbitrage?
B. What happens if the spot rate of the pound in 3 months is $1.99? $1.98? $1.96?
C. How can the US investor undertake covered interest arbigrage if the pound is at a 3-month forward discount of 1% (per year)? How much would the US investor earn on his foreign investment?
5. Discuss the article NAFTA article posted on D2L.
Case
A US importer is buying DM 1 million of equipment to be paid in December.
The current spot rate is $0.5614 per DM (Mark). How can he/she hedge against
unexpected exchange rate changes using options? Assume that he/she wants a
strike price of $0.57. Use the attached Wall Street Journal schedule.
| Option and Strike Underlying Price | Aust. Dollars-cents per unit | Calls-Last | Puts-Last | ||||
| 50,000 Aust$ | Nov. | Dec. | Mar. | Nov. | Dec. | Mar. | |
| 139.53 | 69 | 0.25 | |||||
| 139.53 | 70 | 0.43 | |||||
| 139.53 | 71 | 0.75 | |||||
| 139.53 | 73 | 0.18 | |||||
| Option and Strike Underlying Price | Brit. Pound-Cents per unit | Calls-Last | Puts-Last | ||||
| 12,500BPds | Nov. | Dec. | Mar. | Nov. | Dec. | Mar. | |
| 168.31 | 140 | 0.30 | |||||
| 168.31 | 145 | 0.30 | |||||
| 168.31 | 150 | 0.45 | |||||
| 168.31 | 152.5 | 0.75 | |||||
| 168.31 | 155 | 0.10 | 1.20 | ||||
| 168.31 | 162.5 | 4.00 | 6.90 | 0.90 | |||
| 168.31 | 165 | 3.30 | 4.35 | 5.60 | 0.65 | 1.50 | |
| 168.31 | 167.5 | 2.70 | 4.10 | 2.50 | |||
| 168.31 | 170 | 1.20 | 1.55 | 3.45 | |||
| 168.31 | 172.5 | 0.20 | 1.05 | ||||
| Option and Strike Underlying Price | Brit. Pounds-European Style per unit | Calls-Last | Puts-Last | ||||
| 12,500BPds | Nov. | Dec. | Mar. | Nov. | Dec. | Mar. | |
| 168.31 | 165 | 5.20 | 3.20 | ||||
| Option and Strike Underlying Price | Canadian Dollars-cents per unit | Calls-Last | Puts-Last | ||||
| 50,000 C$ | Nov. | Dec. | Mar. | Nov. | Dec. | Mar. | |
| 76.15 | 73 | 0.25 | |||||
| 76.15 | 73.5 | 0.27 | |||||
| 76.15 | 74 | 0.120 | 0.37 | ||||
| 76.15 | 75.5 | 0.85 | 0.37 | ||||
| 76.15 | 76 | 0.43 | 0.33 | 0.59 | |||
| 76.15 | 76.5 | 0.44 | |||||
| 76.15 | 77 | 0.12 | |||||
| 76.15 | 77.5 | 0.12 | |||||
| Option and Strike Underlying Price | Canadian Dollars- European Style | Calls-Last | Puts-Last | ||||
| 50,000 C$ | Nov. | Dec. | Mar. | Nov. | Dec. | Mar. | |
| 76.15 | 75 | 1.31 | |||||
| 76.15 | 75.5 | 1.18 | |||||
| Option and Strike Underlying Price | W.Ger. Mark-cents per unit | Calls-Last | Puts-Last | ||||
| 62,500 DM | Nov. | Dec. | Mar. | Nov. | Dec. | Mar. | |
| 56.14 | 51 | 0.06 | |||||
| 56.14 | 52 | 0.03 | 0.09 | 0.32 | |||
| 56.14 | 53 | 0.05 | 0.28 | 0.52 | |||
| 56.14 | 54 | 0.15 | 0.22 | 0.65 | |||
| 56.14 | 55 | 1.92 | 0.33 | 0.43 | |||
| 56.14 | 56 | 0.97 | 1.23 | 1.99 | 0.96 | 75 | |
| 56.14 | 57 | 0.54 | 0.82 | ||||
| 56.14 | 58 | 0.40 | 0.38 | 1.15 | |||
| 56.14 | 59 | 0.30 | 3.10 | ||||
| Option and Strike Underlying Price | W.Ger. Marks- EuropeanStyle | Calls-Last | Puts-Last | ||||
| 62,500 DM | Nov. | Dec. | Mar. | Nov. | Dec. | Mar. | |
| 56.14 | 56 | 1.40 | |||||
| 56.14 | 57 | 1.55 | |||||
| Option and Strike Underlying Price | Fr.Francs 10th of a cents per unit | Calls-Last | Puts-Last | ||||
| 125,000 FF | Nov. | Dec. | Mar. | Nov. | Dec. | Mar. | |
| 167.61 | 160 | 7.20 | |||||
| 167.61 | 165 | 4.00 | |||||
| 167.61 | 170 | 1.40 | |||||
| Option and Strike Underlying Price | Japanese Yen 100th of a cent/unit | Calls-Last | Puts-Last | ||||
| 6,250,000Y | Nov. | Dec. | Mar. | Nov. | Dec. | Mar. | |
| 70.47 | 62 | 0.04 | |||||
| 70.47 | 63 | 0.10 | |||||
| 70.47 | 64 | 0.38 | |||||
| 70.47 | 65 | 0.65 | |||||
| 70.47 | 66 | 0.18 | 0.74 | ||||
| 70.47 | 67 | 2.71 | 0.16 | 0.28 | |||
| 70.47 | 68 | 0.25 | 0.58 | 0.99 | |||
| 70.47 | 69 | 1.70 | 2.12 | 0.30 | 0.68 | ||
| 70.47 | 1.55 | 1.85 | 2.60 | 0.60 | 1.05 | ||
| 70.47 | 71 | 0.80 | 1.32 | 1.10 | |||
| 70.47 | 72 | 0.45 | 0.96 | 1.54 | |||
| 70.47 | 73 | 0.28 | 0.76 | ||||
| 70.47 | 74 | 0.19 | 0.50 | 1.06 | |||
| 70.47 | 75 | 0.26 | 0.96 | ||||
| 70.47 | 76 | 0.18 | 0.68 | ||||
| Option and Strike Underlying Price | Swiss Franc-cents per unit | Calls-Last | Puts-Last | ||||
| 62,500 SF | Nov. | Dec. | Mar. | Nov. | Dec. | Mar. | |
| 67.97 | 59 | 0.08 | |||||
| 67.97 | 61 | 0.10 | 0.23 | ||||
| 67.97 | 62 | 0.03 | 0.11 | 0.42 | |||
| 67.97 | 63 | 0.21 | 0.56 | ||||
| 67.97 | 64 | 4.16 | 0.23 | ||||
| 67.97 | 65 | 3.07 | 0.16 | 0.30 | 0.85 | ||
| 67.97 | 66 | 2.65 | 2.83 | 0.25 | 0.58 | ||
| 67.97 | 67 | 0.73 | 1.35 | 2.95 | 0.42 | 0.95 | |
| 67.97 | 68 | 1.08 | 1.32 | 1.23 | |||
| 67.97 | 69 | 0.51 | 1.00 | ||||
| 67.97 | 70 | 0.35 | |||||
| 67.97 | 71 | 0.45 | |||||
Foreign currency options for October 23, 1987. The abbreviation r means "not traded"; s means "no option offered." (Source Wall Street Journal, October
26, 1987, p. 34.)
