In: Finance
1 A) The 90-day forward rate for the euro is $1.08, while the current spot rate of the euro is $1.05. What is the annualized forward premium or discount of the euro?
11.4% discount
11.4% Premium
7.6% premium
7.6% discount
1 B) Assume that a speculator purchases a put option on British
pounds (with a strike price of $1.50) for $.05 per unit. A pound
option represents 31,250 units. Assume that at the time of the
purchase, the spot rate of the pound is $1.51 and continually rises
to $1.58 by the expiration date. The highest net profit possible
for the speculator based on the information above is:
$1,562.50.
–$1,562.50.
–$937.50
–$625.00.
Part 1:
Correct answer is 11.4% premium
Annualized forward premium or discount is given by:
[Forward rate/Spot rate-1]*360/90
Given that forward rate for the euro=$1.08
Current spot rate of the euro is $1.05
Annualized forward premium or discount of the
euro=[$1.08/$1.05-1]*360/90
=[1.028571429-1]*360/90
=0.028571429*360/90
=0.114285716 or 11.4% (this value is positive so it is premium)
Part 2:
Correct answer is -$1,562.50.
The premium of the option is calculated as:
Amount per unit*number of units purchased
Given that the speculator purchased a put option on British pounds
for $.05 per unit. The speculator purchased 31,250 units.
The premium of the option=$.05*31,250=$1562.5
Given that strike price of the put option is $1.50.
As it is a put option, its value will increase if the price falls
below the strike price. As the price has continuously risen to
$1.58 by the expiration date, the option will not be exercised by
the speculator. Hence, the net profit is -$1,562.50.