06 May WHICH ONE SHOULD ABC CHOOSE?
Assume that the transactions listed below are anticipated by U.S. firms that have no other foreign transactions. Place an “X” in the table wherever you see possible ways to hedge each of the transactions.
a. Georgetown Co. plans to purchase Japanese goods denominated in yen.
b. Harvard, Inc., sold goods to Japan, denominated in yen.
c. Yale Corp. has a subsidiary in Australia that will be remitting funds to the U.S. parent.
d. Brown, Inc., needs to pay off existing loans that are denominated in Canadian dollars.
e. Princeton Co. may purchase a company in Japan in the near future (but the deal may not go through).
Forward Contract Futures Contract Options Contract
Forward Forward Buy Sell Purchase Purchase
Purchase Sale Futures Futures Calls Puts
a.
b.
c.
d.
e.
2. ABC CO. purchased a call option on BP for $0.02 per unit. The strike price was $1.45
What is the profit per unit if
a) the spot rate at the time the option is exercised is i) $1.49/BP ii) $1.47 iii) $1.45
b) If there are 31,250 units of BP in the contract what is the net profit (total) if the
spot rate is $1.49?
3. Assume a U. S. speculator sold a call option on Swiss franc for $.01 per unit. The strike price was $.36. What is the net profit per unit if
a) the spot rate at the time the option was exercised is i) $.42 ii) $.36
b) assume there are 125,000 units in SF option. What was the net profit (total) to the seller of the call option?
4. ABC Co. purchased a put option on British Pound for $0.04 per unit. The strike price is $1.80. What is the net profit per unit if the spot rates are:
a) $1.59 b) $1.85 c) $1.76
What is the total profit in a) if there are 12,500 units in 1 option?
5. ABC Co. sold a put option on Canadian $ (CA$) for $0.03. The strike price is $0.75. If the spot rate is $0.72 at expiration, what is net the profit/unit? How much is the profit on the option if there are 50,000 units in 1 option.
6. Assume that a March futures contract on SF was available in January for $.54 per unit. Also assume that forward contracts were available for the same settlement date at a price of $.55 per SF. How could speculators capitalize on this situation, assuming zero transaction costs? How would such speculative activity affect the difference between the forward contract price and the futures price?
7. ABC. Co. based in Texas exported its products to a German company and will receive payments of Euro (E) 1,000,000 in three months. Three month fwd contract is available with a fwd rate of $1.25. Three months futures are available with a futures rate of $1.10. If ABC decides to hedge, what are the $ amounts of revenue from exports? Which one should ABC choose? Suppose, ABC decides not to hedge, how much is saved(lost) by hedging if at the settlement date the spot exchange rate is a) $0.90 b) $1.45
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