FX Markets – Spot and Forwards

Multiple Choice: #s 1-3

1. The forward Indian Rupee, relative to $, given spot rate of Rps 48.50 and a 3 month forward rate of Rps 50.00 is closest to (annualized): 

a. 12 % premium (approx.)                  b. 12.37% discount                 c. 12.37% premium

d. 12% discount (approx.)                  e. 2.91% discount     

2. The bid-ask spot rate is quoted as Real 1.8400 -1.8550 per dollar. I want to exchange $500 for real. How many reals will I get?

a. 271.74                                 b. 920                          c. 927.50         d. 269.54

3. Based on Interest Rate Parity in pesos per dollar terms, larger the difference with which peso interest rate exceeds the dollar interest rate, the:

1. larger will be the forward discount on the peso
2. larger will be the forward premium on the peso
3. smaller will be the forward premium on the peso
4. smaller will be the forward discount on the peso

4. Interest Rate Parity:

The spot rate on the Brazilian real is quoted at $0.5555 and the six month forward rate at $0.5955. Is the real at a forward premium or discount and how much per annum?

5.  In the above problem, is the dollar at a premium or discount and how much per annum?

6.  Assume that the annualized interest rates are 3% in U.S. and 8% in Brazil. Is arbitrage profit possible under covered Interest Rate Parity? Why?

7. If the two interest rates are as shown in problem 6 and the spot rate is $0.5555 per real as shown in problem 5, what should be the six-month forward rate so that there is no arbitrage profit possible?

8. Non-deliverable forwards:    The spot rate for Argentina peso is P2.75/$ and the six-month forward rate is P2.90 /$. The actual rate settles six months later at P2.85/$. If you entered a six month non-deliverable forward contract today to buy P29 million, what is your gain or loss 6 months later?

Futures & Options

1.Speculation:     Today is January 24 and you go long 1 real March futures at an opening trade price of $0.6423 per real with an initial margin of $1,500. The settlement prices for January 24, 25 and 26 are $0.6393, $0.6441 and $0.6496 per real respectively. On January 27 you close out your contract at $0.6483 per real.

(a) Calculate your daily account position and

(b) Find the ending account balance on January 27 at liquidation

(size of contract = real 125,000)

2. Futures Hedging:               On March 15, a US firm is planning to import Russian vodka worth 5 million rubles due on April 15. Firm decides to hedge its payables position by using June ruble futures traded on CME. The spot rate on March 15 is US $0.0330/ruble and the June futures price on March 15 is at $ 0.0300/ruble. On April 15, the spot rate is $0.0380 / ruble while the June futures is $ 0.0350 / ruble. 

(a) Calculate the net gain or loss from the futures? 

(b) What is the net cost to the importer?

3. Options Hedging:               On March 15, a US firm is planning to import Indian software worth Rs. 1 million due on April 15 (one day later). Firm decides to hedge its payables position by using OTC April 15 call option on the rupee.

The spot rate is US $0.0220/rupee and the April call for X= $ 0.0200 / rupee is quoted at $0.0010/rupee. On April 15, the spot rate settles at $ 0.0190 / rupee.

What is the cost of the call option in dollars?

Do you exercise the call or not?

What is the dollar payables from options hedging?            

4.     A U.S. firm can hedge its South African rand receivables against depreciation by:

a. selling rand futures                                 b. buying rand futures

c. buying rand forward                               d. none of the above

===================================================================

“