Answers to Problems from book:
Chp. 13: The Foreign Exchange Market.
6. a) What is the dollar cost of the contract? 1 contract will cost $1,250.0 (¥6,250,000 x $.0002), and 10 contracts will cost $12,500.
b) let it expire b/c the spot rate is below the strike price--lose $12,500.
c) exercise it, at zero net cost (break even). $12,500-$12,500.
Chp. 15:
1 a) Dollar is selling at a premium or franc is selling at a discount.
b) $.02 discount is an annual rate of approx. 8%. Why? b/c .02 x 4 (360/90) = .08
2. a) 0.08-0.05= (F - 0.60)/.60 implies F= $.618/SF
b) there is no observable expected future spot rate b/c each person has a different subjective estimate. Best approx. is the forward rate.
c) ( i-i*)/1+i*= (F-e)/e implies, (i - 0.05)/1.05 = (.63-.60)/.60. Therefore, i = .0525 + .05 = .1025 or in percent, 10.25%.