Ps3-ans-international-finance

ProblemSet3ofFINA3404Instructor:Dr.DuDuSelectthebestanswersforquestions1-9(2.5ptseachfor1-8;3ptfor9)1.SupposeyouenterintothelongpositionofaEurodollarinterestratefutureswiththefuturespriceof96.Attheexpirationdateofthefuturescontract,thespotrateofthethreemonthLIBORis6%.Whatisyourprofit/lossfromholdingthisfuturesposition?A)youlose$50B)yougain$50C)youlose$5,000D)yougain$5,000Answer:C)2.Considerbothacalloptionandaputoptionwrittenoneuro.Whentheeuroexchangeratebecomeslessvolatile,whichofthefollowingstatementsiscorrectA)thecalloptionbecomescheaperwhereastheputoptionbecomesmoreexpensiveB)theputoptionbecomescheaperwhereasthecalloptionbecomesmoreexpensiveC)boththecallandtheputbecomecheaperD)boththecallandtheputbecomemoreexpensive.AnswerC)3.Consideraputfuturesoptionwrittenononeeurofuturescontract,andeacheurofuturescontractiswrittenon€12,500.Supposetheoptionpremiumandthestrikepriceare$0.15/€and$1.5/€,respectively.Atexpirationoftheoptioncontract,thespotandthefuturesexchangerateare1.405$/€and1.4$/€,respectively.Thetotalprofit/lossfortheoptionwriteristhusA)$1875B)$687.5C)$625D)$-625Answer:C).reasoning:Theholderspaysanoptionpremiumof0.15*12,500=$1875upfront.Uponmaturity,theholderwillexercisetheoptioncontract,andgetpaidby(1.5-1.4)*12500=$1250.ThenetP/Lfortheholderisthus-$625,hencethenetP/Lforthewriteris$6254.SupposethatyourfirmisaU.S.-basedimporterofGermanautomobileaccessories.Youpayforthemineurosandsellthemindollars.Youhavejustorderednextyear'sinventory.Inoneyearyourfirmowesapaymentof€100,000toyourGermansupplier.Today'sspotexchangerateis€1.00=$1.20;theone-yearforwardrateis€1.00=$1.15.Howcanyoufixthedollarcostofthisorder?(Answer:A)A)Enterintolongpositionintheone-yeareurofuturescontractat€1.00=$1.15.Thiswillfixthecostof€100,000at$115,000.B)Enterintoshortpositionintheone-yeareurofuturescontractat€1.00=$1.15.Thiswillfixthecostof€100,000at$115,000.C)Sincethespotpriceismorethantheforwardprice,youshouldtradeyourdollarsforeurostodayandpayyoursupplierearly.D)Sellacalloptionontheeurowithaone-yearmaturity.5.SupposethatyourfirmisaU.S.-basedimporterofGermanautomobileaccessories.Youpayforthemineurosandsellthemindollars.Youhavejustorderednextyear'sinventory.Inoneyearyourfirmowesapaymentof€100,000toyourGermansupplier.Today'sspotexchangerateis€1.00=$1.20,andyoubuyaone-yearcalloptionwrittenon€100,000withthestrikepriceof$1.20/€tohedgetheriskypayable.Supposetheoptionpremiumis$0.06/€,andinoneyeartheexchangerateturnsouttobe$1.30/€.Whattheprofit/lossonyourhedgedpositionrelativetotoday’sexchangerate?(Answer:C:thesimplestwaytothinkaboutitistonoticethatthehedgedpositionisasyntheticputoptionwiththeoptionpremiumof$0.06/€andstrikepriceof$1.20/€.Inoneyear,theputoptionfinishesOTM,hencetheU.S.importerhaslostthealltheoptionpremiumequaling0.06*100,000=$6,000)A)$10,000B)$4000C)-$6,000D)-$10,0006.Thebestfinancialinstrumenttohedgearecurrentexposureis(Answer:D)A)forwardsB)futuresC)optionsD)swaps7.Whichofthefollowingstatementsabouttheportfoliofrontieris(are)correct?(Answer:B.Noteportfoliofrontierincludesbothefficientportionandtheinefficientportion,thelatterofwhichminimizesinsteadofmaximizingtheexpectedreturn)i)Portfoliofrontierincludesboththeefficientfrontierandtheinefficientfrontierii)Giventheexpectedreturn,aportfolioontheportfoliofrontierhasthesmallestreturnvarianceamongallportfoliosiii)Giventhereturnvolatility,aportfolioontheportfoliofrontierhasthelargestexpectedreturn.A)i)onlyB)i)andii)C)ii)andiii)D)i),ii),andiii)8.Themeanandstandarddeviation(SD)oftwostocks,AandB,areasfollowsCountryMean(%)SD(%)A1018B1220Supposethetwostocksarenotcorrelated.Consideraportfoliowith30%investmentinAand70%investmentinB.Whatisthestandarddeviationfortheportfolioreturn?A)13.5%B)14%C)15%D)19.4%Answer:c)rational:applytheformula,2222p0.30.180.70.20.159.Intheabovequestion,whatistheexpectedreturnfortheglobalminimumvarianceportfolio?A)13.67%B)13.38%C)10.89%D)11.11%Answer:C.Firstweneedtocomputetheweightsassignedtotheassetsasfollows:2222220.20.5525,10.44750.180.2BABAAB.Theexpectedreturnisthus0.552510%0.447512%0.108910.(8pts)Supposetodaythe(annualized)interestratesonUSDandAUDare0%and4%,respectively,andtheexchangerateis$1/AU$.Considerthefollowingtwostrategies.InstrategyA,youborrowonemillionUSDandusetheproceedstobuyonemillionAUD.InstrategyB,youlongaone-yearforwardcontractwhichiswrittenononemillionAUD.Theinvestmenthorizonisoneyearandinterestsareonlypaidattheendoftheone-yearhorizon.Supposetheexchangeratechangesto$1.1/AU$inoneyear.a)(2points)Calculateyourprofit/loss(quotedinUSD)fromstrategyA.b)(3points)Calculateyourprofit/loss(quotedinUSD)fromstrategyB.(Hint:firstdeterminetheforwardrateusingthestrictformofIRP)c)(3points)Repeatb)whenaforwardcontractiswrittenonAUD1,000,000/Finstead,whereFdenotestheforwardexchangeratecalculatedinb).Compareyourresultwiththatina):whatconclusioncanyoudraw?Answer:a)FromstrategyA,youpaynointerestsfromborrowingUSD,andreceivesinterestpaymentequalingAU$0.04*1,000,000=AU$40,000=$44,000,whereI’veusedtheexchangerateinoneyear.Inaddition,theAU$1,000,000inon