Question Details

Impact of Information on Currency Futures 


1. Currency Strangles. For the following options available on Australian dollars (A$), construct a
worksheet and contingency graph for a long strangle. Locate the break-even points for this
strangle. (See Appendix B in this chapter.)
• Put option strike price = $.67
• Call option strike price = $.65
• Put option premium = $.01 per unit
• Call option premium = $.02 per unit

2. Impact of Information on Currency Futures and Options Prices. Myrtle Beach Co. purchases
imports that have a price of 400,000 Singapore dollars and it has to pay for the imports in 90 days.
It can purchase a 90-day forward contract on Singapore dollars at $.50 or purchase a call option
contract on Singapore dollars with an exercise price of $.50 to cover its payables. This morning,
the spot rate of the Singapore dollar was $.50. At noon, the central bank of Singapore raised
interest rates, while there was no change in interest rates in the U.S. These actions immediately
increased the degree of uncertainty surrounding the future value of the Singapore dollar over the
next three months. The Singapore dollar- spot rate remained at $.50 throughout the day.
a. Myrtle Beach Co. is convinced that the Singapore dollar will definitely appreciate
substantially over the next 90 days. Would a call option hedge or forward hedge be more
appropriate given its opinion?
b. Assume that Myrtle Beach uses a currency options contract to hedge rather than a forward
contract. If Myrtle Beach Co. purchased a currency call option contract at the money on
Singapore dollars this afternoon, would its total U.S. dollar cash outflows be MORE THAN,
Future spot
rate
$.64 $.68
$.65 $.67
-$.01
$.64
LESS THAN, or THE SAME AS the total U.S. dollar cash outflows if it had purchased a
currency call option contract at the money this morning? Explain.



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