Problem 7.

2 Laura Cervantes

Laura Cervantes, the currency speculator we met earlier in the chapter,sells eight June futures contracts for
500,000 pesos at the closing price quoted in Exhibit 7.1.

a. What is the value of her position at maturity if the ending spot rate is $0.12000/Ps?
b. What is the value of her position at maturity if the ending spot rate is $0.09800/Ps?
c. What is the value of her position at maturity if the ending spot rate is $0.11000/Ps?

a. b. c.
Assumptions Values Values Values
Number of pesos per futures contract 500,000 500,000 500,000
Number of contracts 8.00 8.00 8.00
Buy or sell the peso futures? Sell Sell Sell

Ending spot rate ($/peso) $0.12000 $0.09800 $0.11000

June futures settle price from Exh8.1 ($/peso) $0.10773 $0.10773 $0.10773
Spot - Futures $0.01227 ($0.00973) $0.00227

Value of total position at maturity (US$) ($49,080.00) $38,920.00 ($9,080.00)

Value = - Notional x (Spot - Futures) x 8

Interpretation

Laura buys at the spot price and sells at the futures price. If the futures price is greater than the ending spot
price, she makes a profit.
Problem 7.3 Cece Cao in Jakarta

Cece Cao trades currencies for Sumatra Funds in Jakarta. She focuses nearly all of her time and attention on the U.S.
dollar/Singapore dollar ($/S$) cross-rate. The current spot rate is $0.6000/S$. After considerable study, she has concluded
that the Singapore dollar will appreciate versus the U.S. dollar in the coming 90 days, probably to about $0.7000/S$. She
has the following options on the Singapore dollar to choose from:

Option Strike Price Premium

Put on Sing $ $0.6500/S$ $0.00003/S$
Call on Sing $ $0.6500/S$ $0.00046/S$

a. Should Cece buy a put on Singapore dollars or a call on Singapore dollars?

b. What is Cece's breakeven price on the option purchased in part (a)?
c. Using your answer from part (a), what is Cece's gross profit and net profit (including premium) if the spot rate at the end
of 90 days is indeed $0.7000/S$?
d. Using your answer from part (a), what is Cece's gross profit and net profit (including premium) if the spot rate at the
end of 90 days is $0.8000/S$?

Option choices on the Singapore dollar: Call on S$ Put on S$

Strike price (US$/Singapore dollar) $0.6500 $0.6500
Premium (US$/Singapore dollar) $0.00046 $0.00003

Assumptions Values
Current spot rate (US$/Singapore dollar) $0.6000
Days to maturity 90
Expected spot rate in 90 days (US$/Singapore dollar) $0.7000

a. Should Cece buy a put on Singapore dollars or a call on Singapore dollars?

Since Cece expects the Singapore dollar to appreciate versus the US dollar, she should buy a call on Singapore dollars.
This gives her the right to BUY Singapore dollars at a future date at $0.65 each, and then immediately resell them in the
open market at $0.70 each for a profit. (If her expectation of the future spot rate proves correct.)

b. What is Cece's breakeven price on the option purchased in part a)?

Per S$
Strike price $0.65000
Note this does not include any interest cost on the premium. Plus premium $0.00046
Breakeven $0.65046

c. What is Cece's gross profit and net profit (including premium) if the ending spot rate is $0.70/S$?

Gross profit Net profit

(US$/S$) (US$/S$)
Spot rate $0.70000 $0.70000
Less strike price ($0.65000) ($0.65000)
Less premium ($0.00046)
Profit $0.05000 $0.04954

d. What is Cece's gross profit and net profit (including premium) if the ending spot rate is $0.80/S$?

Gross profit Net profit

(US$/S$) (US$/S$)
Spot rate $0.80000 $0.80000
Less strike price ($0.65000) ($0.65000)
Less premium ($0.00046)
Profit $0.15000 $0.14954
Problem 7.4 Hoffman Bank, Basel (A)

Stefan Boerig trades currency for the Hoffman Bank in Basel, Switzerland. Stefan has 10 million Swiss francs (SF) to begin
with, and he must state all profits at the end of any speculation while the 30-day forward rate is SF1.1027/€.

a. If Stefan believes the euro will continue to rise in value against the Swiss franc and expects the spot rate to be SF1.1375/€ at
the end of 30 days, what should he do?

b. If Stefan believes the euro will depreciate in value against the Swiss franc and expect the spot rate to be SF1.0925/€ at the
end of 30 days, what should he do?

a. b.
Assumptions Values Values
Initial investment (funds available) 10,000,000.00 CHF 10,000,000.00 CHF
30-day forward rate (CHF/€) 1.1027 CHF 1.1027 CHF
Expected spot rate in 30 days (CHF/€) 1.1375 CHF 1.0927 CHF

Strategy for Part a):

One of the more interesting dimensions of speculating in the forward market, is that if the speculator has access to the forward
market (bank lines or relationships when working on behalf of an established firm), many forward speculation strategies require
no actual cash flow position up-front. In this case, Stefan believes the Swiss franc will be trading at CHF1.1375/€ in the open
market at the end of 30 days, but he has the ability to buy or sell Swiss francs at a forward rate of CHF1.1375/€. He should
therefore buy euros forward 30 days (requires no actual cash flow up-front), and at the end of 30 days take delivery of those
euros and sell in the spot market at the higher Swiss franc rate for profit.

Initial investment principle 10,000,000.00 CHF

30 day forward rate (CHF/€) 1.1027 CHF
Euros bought forward (Investment / forward rate) € 9,068,649.68
Spot rate in open market at end of 30 days (CHF/€) 1.1375 CHF
CHF proceeds (euros bought forward exchanged to CHF spot) 10,315,589.01 CHF
Profit in CHF 315,589.01 CHF

Strategy for Part b):

Again, a profitable strategy can be executed without any actual cash flow changing hands at the beginning of the period. Since
Christoph believes that the Swiss franc will strengthen to CHF1.0925 in 30 days, he should sell euros forward now at the higher
Swiss franc rate, wait 30 days and buy the euros needed on the open market at CHF1.0925, and immediately then use those
euros to fulfill his forward contract to sell euros for Swiss francs at CHF1.1027. For a profit.

Investment funds needed in 30 days 10,000,000.00 CHF

Spot rate in open market at end of 30 days 1.0927 CHF
Euros bought in open market in 30 days (Investment / spot rate) € 9,151,642.72

Stefan had sold these euros forward at the start of the 30 day period.
30 day forward rate (CHF/€) 1.1027 CHF
CHF proceeds (euros sold forward into CHF) 10,091,516.43 CHF
Profit in CHF 91,516.43 CHF
Problem 7.8 Valdor Capital

Baradan Kuppusamy works as a currency speculator for Valdor Capital headquartered in Kuala Lumpur. His
most recent speculative position is to profit from his expectation that the Thai baht will rise significantly
against the Malaysian ringgit. The current spot rate is RM0.1382/THB. He must choose between the
following 90-day options on the Malaysian ringgit.

Option Strike Price Premium

Put on Malaysian ringgit MYR0.1600/THB THB0.005
Call on Malaysian ringgit MYR0.1600/THB THB0.0025

a. Should Baradan buy a put on Malaysian Ringgit or a call on Malaysian Ringgit?

b. What is Baradan’s break-even price on the option purchase in part (a)?
c. Using your answer from part (a), what are Baradan’s gross profit and net profit (including premium) if the
spot rate at the end of 90 days is RM0.2000/THB?

Assumptions Values
Current spot rate (MYR/THB) 0.1382
in THB/MYR THB 7.23589
Maturity of option (days) 90
Expected ending spot rate in 90 days (MYR/THB) 0.2000
in THB/MYR THB 5.00000

Call on ringgit Put on ringgit

Strike price (MYR/THB) MYR 0.1600 MYR 0.1600
in THB/MYR THB 6.25000 THB 6.25000
Premium (US$/yen) THB 0.00500 THB 0.00250

a. Should Baradan buy a put on Malaysian Ringgit or a call on Malaysian Ringgit?

Baradan should buy a put on Malaysian ringgit to profit from the rise of the Thai bhat (the fall of the ringgit).

b. What is Baradan’s break-even price on the option purchase in part (a)?

Cachita buys a put on Malaysian ringgit. Pays premium today.
In 90 days, exercises the put, receiving Thai bhat.
in THB/MYR
Strike price THB 6.25000 0.1600
Less premium -THB 0.00250
Breakeven THB 6.24750 0.1601

c. What are Baradan’s gross and net profit (including premium) if the spot rate
at the end of 90 days is MYR0.2000/THB?
Gross profit Net profit
(THB/MYR) (THB/MYR)
Strike price THB 6.25000 THB 6.25000
Less spot rate -THB 5.00000 -THB 5.00000
Less premium -THB 0.00250
Profit THB 1.25000 THB 1.24750
Problem 7.11 Bambang Pamungkas at CCB Bank

Bambang Pamungkas works for CCB Bank Currency Trading Desk in Montreal, Canada. Bambang is something of a
contrarian – as opposed to most of the forecasts, he believes the Canadian dollar (C$) will appreciate versus the British
pound over the coming 90 days. The current spot rate is £0.5931/C$. Bambang may choose between the following
options on the Canadian dollar.

Option Strike Price Premium

Put on C$ £0.6500 £0.0035
Call on C$ £0.6500 £0.0055

a. Should Bambang buy a put on Canadian dollars or a call on Canadian dollars?

b. What is Bambang’s break-even price on the option purchased in part (a)?
c. Using your answer from part (a), what are Bambang’s gross profit and net profit (including premium) if the spot rate
at the end of 90 days is indeed £0.7300?
d. Using your answer from part (a), what are Bambang’s gross profit and net profit (including premium) if the spot rate
at the end of 90 days is indeed £0.7850?

Assumptions Values
Current spot rate (£/Canadian dollar) £0.5931
Days to maturity 90

Option choices on the Canadian dollar: Call option Put option

Strike price (£/Canadian dollar) £0.6500 £0.6500
Premium (£/Canadian dollar) £0.0055 £0.0035

a) Which option should Bambang buy?

Since Bambang expects the Canadian dollar to appreciate versus the pound, he should buy a call on Canadian dollars.

b) What is Bambang's breakeven price on the option purchased in part a)?

Strike price £0.6500

Plus premium £0.0055
Breakeven £0.6555

c) What is Bambang's gross profit and net profit (including premium) if he ending spot rate is £0.730/C$?

Gross profit Net profit

(£/C$) (£/C$)
Spot rate £0.7300 £0.7300
Less strike price (0.6500) (0.6500)
Less premium (0.00550)
Profit £0.0800 £0.0745

d) What is Bambang's gross profit and net profit (including premium) if the ending spot rate is £0.7850/C$?

Gross profit Net profit

(£/C$) (£/C$)
Spot rate £0.7850 £0.7850
Less strike price (0.6500) (0.6500)
Less premium (0.00550)
Profit £0.1350 £0.1295