International Financial Management

Chapter 5
1. Hedging with Currency Options When would a U.S. firm consider purchasing a call option on
Canadian dollars for hedging? When would a U.S. firm consider purchasing a put option on
Canadian dollars for hedging? (1 point)
2. Speculating with Currency Options When should a speculator purchase a call option on
euros? When should a speculator purchase a put option on euros? (1 point)
3. Speculating with Currency Call Options Randy Rudecki purchased a call option on British
pounds for $.02 per unit. The strike price was $1.45, and the spot rate at the time the option
was exercised was $1.46. Assume there are 31,250 units in a British pound option. What was
Randy’s net profit on this option? (Hint: firstly, calculate the net profit per unit, then multiply
profit per unit by number of units in an option) (1 point)
4. Speculating with Currency Put Options Alice Duever purchased a put option on British
pounds for $.02 per unit. The strike price was $1.38, and the spot rate at the time the pound
option was exercised was $1.35. Assume there are 31,250 units in a British pound option.
What was Alice’s net profit on the option? (1 point)
5. Selling Currency Call Options Mike Suerth sold a call option on Canadian dollars for $.01 per
unit. The strike price was $.76, and the spot rate at the time the option was exercised was
$.82. Assume Mike did not obtain Canadian dollars until the option was exercised. Also
assume that there are 50,000 units in a Canadian dollar option. What was Mike’s net profit
on the call option? (1 point)
6. Selling Currency Put Options Brian Tull sold a put option on Canadian dollars for $.02 per
unit. The strike price was $.78, and the spot rate at the time the option was exercised was
$.75. Assume Brian immediately sold off the Canadian dollars received when the option was
exercised. Also assume that there are 50,000 units in a Canadian dollar option. What was
Brian’s net profit on the put option? (1 point)
7. Hedging with Currency Derivatives A U.S. professional football team plans to play an
exhibition game in the United Kingdom next year. Assume that all expenses will be paid by
the British government, and that the team will receive a check of 1 million pounds. The team
anticipates that the pound will depreciate substantially by the scheduled date of the game.
In addition, the National Football League must approve the deal, and approval (or
disapproval) will not occur for 3 months. How can the team hedge its position? What is there
to lose by waiting 3 months to see if the exhibition game is approved before hedging? (1
point)
Chapter 7
1. Locational Arbitrage Assume the following information:
South Bank North Bank
Ask price of New Zealand dollar $.725 $.732
Bid price of New Zealand dollar $.722 $.728

Given this information, is locational arbitrage possible? If so, explain the steps involved in
locational arbitrage, and compute the profit from this arbitrage if you had $1 million to use.
What market forces would occur to eliminate any further possibilities of locational arbitrage?
(1 point)
2. Triangular Arbitrage Assume the following information:
Quoted Price
Value of British pound in U.S. dollar $1.30
Value of New Zealand dollar in U.S. dollar $.65
Value of British pound in New Zealand dollar NZ$1.98

Given this information, is triangular arbitrage possible? If so, explain the steps that would
reflect triangular arbitrage, and compute the profit from this arbitrage if you had $1 million to
use. What market forces would occur to eliminate any further possibilities of triangular
arbitrage? (1 point)
3. Covered Interest Arbitrage Assume the following information:
Spot rate of Canadian dollar $.80
90-day forward rate of Canadian dollar $.79
90-day Canadian interest rate 4%
90-day U.S. interest rate 2.5%

Given this information, what would be the yield (percentage return) to a U.S. investor who
used covered interest arbitrage? (Assume the investor invests $1 million.) What market forces
would occur to eliminate any further possibilities of covered interest arbitrage? (1 point)