Question

Section 2 Calculations. 5pt each, 50 pts total. Show your work!

1. Suppose, the spot exchange rate is Euro €1.00 = $1.50 and the rates of inflation expected to prevail for the next year in the U.S. is 2% and 1% in the euro zone. Under the PPP, what is the one-year forward rate, €1 = $_________, that should prevail, round to 4 decimal places?
2. Yesterday, you entered into a futures contract to buy Euro 62,500 at $1.5500 per Euro. Your initial performance bond is $1,500 and your maintenance level is $1,000. At what settle price, $___/euro, will you get a demand for additional funds to be posted, round to 4 decimal places?
3. The price for a call option contract on 100 shares of XYZ stock, at a strike price of $100/share at the expiry date in three months is $30. The price for a put option contract on 100 shares of XYZ stock, at a strike price of $100/share at the expiry date in 6 months is $35. Assume Jane shorts a call and also shorts a put, invests the proceeds at 5%. Calculate her position (gain / loss), to nearest cents, assume the stock price is $99.5 at maturity.
4. Yesterday, you entered into a futures contract to buy €62,500 at $1.42 per €. Suppose the futures price closes today at $1.39. At the beginning of the day, your performance bond is $1,500. How much have you made/lost today and what is your bond ending balance?
5. A single call option contract on 1 share of XYZ stock at a strike price of $100/share at the expiry date in 1 year. The borrowing/lending rate is 6%. Suppose that the current stock price is 95 and 1 year later, the stock price is either $90 or $100. Use the binomial approach, calculate this option price, round to 4 decimal places.

Answer 1

1). Under PPP, forward rate_(F/D) = spot rate_(F/D)*(1+inflation_foreign)/(1+inflation_domestic)

= $1.50/€*(1+2%)/(1+1%) = $1.5149/€

2). Margin call = contract size*(Initial contract price - last settlement)

Margin call = initial performance bond - maintenance level = 1,500-1,000 = $500

Contract size = €62,500

Initial contract price = $1.55/€

Let the last settlement price be L

$500 = €62,500*($1.55/€ - L)

1.55 - L = 500/62,500

L = 1.55 - (500/62,500)

L = $1.542/€ (Answer)