Grether FIN 4010 Assignment 5

Name___Justin Barnes____

Please expand this document as necessary to answer the questions below. You need to show your work to receive full credit. When finished, submit it through the Turnitin link in the Bb course shell any time before class on Wednesday, March 28. We will review it in class.
1.

Assume on April 1, 2012 you purchase a futures contract on Swiss francs with a contract size of SFr 125,000. Swiss francs have an initial bond of $1485.00 and the maintenance bond is $1100. Complete the table below to mark-to-market your futures contract for the dates given and answer questions a-d that follow. I do not think I am doing this correctly. Following the books directions but I am very unsure.
Date April 1 April 2 April 3 April 4 April 5 April 6 April 7 April 8
a.

Closing Price $1.100 $1.097 $1.092 $1.085 $1.080 $1.092 $1.102 $1.111

Contract Size $125,000 -

Value 12.5

Value N/A

Bond Account $1485.00

125000x(1.1-1.097) -375 ($1083) (1485-1083+375 = 777)??? 125000x(1.097-1.092) -625 (860) (1485-860+625 = 1250) 125000x(1.092-1.085) -875 (610) (1485-610+875 = 1750) 125000x(1.085-1.080) -625 (860) (1485-860+625 = 1250) 125000x(1.092-1.080) +1500 125000x(1.102-1.092) +1250 125000x(1.111-1.102) +1125

Assuming that you made no withdrawals from your bond account, how much money did you have to put into your bond account over these 8 days? $2500 gain of 1375 (3875 2500) b. How much money is in your bond account on April 8? $2860 c. How much has the value of your contract changed between purchasing it on April 1 and the market close on April 8? d. Is the difference between your answers for a and b equal to your answer for c?
2.

Assume on April 1, 2012 you purchase a December call option on Euros with a strike price of $1.445/. The option contract size is 62,500. Todays spot rate is $1.420/ a. What is the intrinsic value of the option? There isnt one. You would pay more. b. What is the option worth? 62500*1.445 = $90312.5 62500*1.420 = 88750 ($1562.5) c. If the spot rate increases to $1.445/ sometime in July, do your answers to a and b change? If so, how? If not, why not? Yes answer A would change because the spot rate would equal the strike price. d. On December 10, the spot rate is at $1.460/. If you sold your option, what would be its minimum value? 62500*1.460 (91250) 90312.5 = $937.5 Absolutely no idea what I am doing. Using the initial information from question 2, assume that in addition to purchasing the call option you also simultaneously wrote and sold a call option on Euros with a strike price of $1.455. Assume that the premium you earned selling the call exactly offset the premium you paid on the call you bought. What is the net effect of these options on your financial position if: a. The spot rate never moves above $1.445/? b. The spot rate moves to $1.450/ but not higher?

3.

c. The spot rate moves to $1.460/?

4. Company A (a Japanese company) can borrow Japanese yen at fixed 8% or US dollars at fixed 10%. Company B (an American company) can borrow Japanese yen at fixed 11% or US dollars at fixed 7%. Assume company A needs to borrow $10,000,000 to finance new construction in the US and company B needs to borrow the same amount in yen to pay for new equipment. Both would like to repay the loan in one year. The spot rate today is 125/$. The 360-day forward rate is 127.
a.

b.
c. d.

e.
f.

g.

Assume company A had to borrow in US dollars, what amount would that be in yen today? What amount would company A need to repay in dollars at the end of the year? What would the cost of borrowing be to company A in Japanese yen? Assume company B had to borrow in Japanese yen, what amount would that be in dollars today? What amount would company B need to repay in yen at the end of the year? What would the cost of borrowing be to company B in dollars? If A and B agree to swap their principal and interest payments, how much can each company save relative to the cost of borrowing in each others currency?