Question

In: Finance

Assume that December 2019 Mexican Peso futures contract has a price of $.90975 per 10MXN. You...

Assume that December 2019 Mexican Peso futures contract has a price of $.90975 per 10MXN. You believe the spot price in December will be $.9700 per10MXN. The size of 1 MXN futures contract is MXN500,000. What position do you need to enter into to benefit from your anticipation? If you use three futures contracts, what is your profit/loss if you end up correct in your belief?

A speculator is considering the purchase of five three-month Euro call options (size €100,000 each) with a striking price of $.869/€. The premium is 1.35 cents per €. The spot price is $.84/€ and the 90-day forward rate is $.85/€. The speculator believes the euro will appreciate to $.91/€ over the next three months. As the speculator’s assistant, you have been asked to prepare the following:
A.-Determine the speculator’s profit if the euro appreciates to $.91/€.
Determine the speculator’s profit if the euro appreciates only to the forward rate
Determine the future spot rate at which the speculator will only break even.

Expert Solution

Mexican Peso futures

To benefit, a long position should be taken as you anticipate the spot price in December will be higher than the current price of the December futures contract.

Profit = (spot price in December - current price of the December futures contract) * number of contracts * contract size

Here, the contract size is 50,000 since the currency quote is given for 10MXN, and the size of 1 MXN futures contract is MXN500,000.

Profit = (0.9700 - 0.90975) * 3 * 50,000 = $9037.50

Euro call options

A]

profit = ((euro price after 3 months - option strike price) * contract size) - premium paid

premium paid = (cents per € / 100) * contract size = (1.35 / 100) * 100,000 = $1350

profit = ((0.91 - 0.869) * 100,000) - 1350 = $2750

B]

If the euro appreciates to only the forward rate, the call option will not be exercised as it is not profitable to do so. The loss equals the premium paid.

loss = premium paid = $1350

C

breakeven rate = option strike price + premium per euro

breakeven rate = 0.869 + 0.0135 = $0.8825 per euro

jeff jeffy answered 1 week ago

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