FIN 535 Week 3 Homework Assignment

FIN 535 Week 3 Homework Assignment 
1 Speculation on Expected Exchange Rates. Kurnick Co. expects that the pound will depreciate from $1.70 to $1.68 in one year. It has no money to invest, but it could borrow money to invest. It has been approved by a bank to borrow either 1 million dollars or 1 million pounds for one year. It can borrow dollars at 6% or Bitish pounds at 5% for one year. It can invest in a risk-free dollar deposit at 5% for one year or a risk-free British deposit at 4% for one year. Determine the expected profit or loss (in dollars) if Kurnick  Co. pursues a strategy to capitalize on the expected depreciation of the pound. 
 
2. Movements in Cross Exchange Rates. Last year a dollar was equal to 7 Swedish kronor, and a Polish zloty was equal to $.40. Today, the dollar is equal to 8 Swedish kronor and a Polish zloty is equal to $.44. By what percentage did the cross exchange rate of the Polish zloty in Swedish kronor (that is, the number of kronor that can be purchased with one zloty) change over the last year? 
 
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- net profit on this option?
 
4. Estimating Profits From Currency Futures and Options.  One year ago, you sold a put option on 100,000 euros with an expiration date of one year. You received a premium on the put option of $.04 per unit. The exercise price was $1.22. Assume that one year ago, the spot rate of the euro was $1.20, the one-year forward rate exhibited a discount of 2%, and the one-year futures price was the same as the one-year forward rate.  From one year ago to today, the euro depreciated against the dollar by 4 percent. Today the put option will be exercised (if it is feasible for the buyer to do so).
 
a.  Determine the total dollar amount of your profit or loss from your position in the put option.
b. Now assume that instead of taking a position in the put option one year ago, you sold a futures contract on 100,000 euros with a settlement date of one year. Determine the total dollar amount of your profit or loss.