International Finance Fin 343 Summer 2015 Assignment #2 1

| June 1, 2016

nternational Finance Fin 343 Summer 2015
Assignment #2
1. On Monday morning, an investor takes a long position in a pound futures contract that
matures on Wednesday afternoon. The agreed-upon price is $1.78 for £62,500. At the close
of trading on Monday, the futures price has risen to $1.79. At Tuesday close, the price rises
further to $1.80. At Wednesday close, the price falls to $1.785, and the contract matures. The
investor takes delivery of the pounds at the prevailing price of $1.785.
a. [8 pts] Detail the daily settlement process in the table below. Show the loss or gain
each day, if any, and the final days cash flow from the investors perspective in the
Cash Flow column.
b. [2 pts] What will be the investor’s profit (loss)?
Investors Action
Cash Flow

2. Eagle Corporation must pay its Japanese supplier ¥125 million in three months. It is
thinking of buying 20 yen call options (contract size is ¥6.25 million) at a strike price of
$0.00800 in order to protect against the risk of a rising yen. The premium is 0.015 cents per
yen. Alternatively, Eagle could buy 10 three-month yen futures contracts (contract size is
¥12.5 million) at a price of $0.007940 per yen. The current spot rate is ¥1 = $0.007823.
Suppose Eagle’s treasurer believes that the most likely value for the yen in 90 days is
$0.007900, but the yen could go as high as $0.008400 or as low as $0.007500.
a. [4 pts] What are Eagle’s gains and losses on the call option position and the futures position
within its range of expected prices? Ignore transaction costs and margins.
b. [4 pts] Calculate what Eagle would gain or lose on the option and futures positions if the
yen settled at its most likely value.
c. [2 pts] What is Eagle’s break-even future spot price on the option contract? On the futures

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