8/2/2019 Grether FIN 4010 Assignment 5

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Grether FIN 4010 Assignment 5 Name___Justin Barnes____

Please expand this document as necessary to answer the questions below. You need to show yourwork to receive full credit. When finished, submit it through the Turnitin link in the Bb course shell anytime 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 contractsize 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 thedates 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 Closing Price Contract Size Value Value Bond Account

April 1 $1.100 $125,000 12.5 N/A $1485.00April 2 $1.097 - 125000x(1.1-1.097) -375 ($1083)

(1485-1083+375 = 777)???

April 3 $1.092 - 125000x(1.097-1.092) -625 (860)(1485-860+625 = 1250)

April 4 $1.085 - 125000x(1.092-1.085) -875 (610)(1485-610+875 = 1750)April 5 $1.080 - 125000x(1.085-1.080) -625 (860)

(1485-860+625 = 1250)

April 6 $1.092 - 125000x(1.092-1.080) +1500April 7 $1.102 - 125000x(1.102-1.092) +1250April 8 $1.111 - 125000x(1.111-1.102) +1125

a. Assuming that you made no withdrawals from your bond account, how much money didyou 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? $2860c.

How much has the value of your contract changed between purchasing it on April 1 andthe 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 priceof $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 thespot rate would equal the strike price.

d.

On December 10, the spot rate is at $1.460/. If you sold your option, what wouldbe its minimum value? 62500*1.460 (91250) 90312.5 = $937.5Absolutely no idea what I am doing.

3. Using the initial information from question 2, assume that in addition to purchasing the calloption 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 premiumyou paid on the call you bought. What is the net effect of these options on your financialposition if:

a. The spot rate never moves above $1.445/?b. The spot rate moves to $1.450/ but not higher?

8/2/2019 Grether FIN 4010 Assignment 5

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c. The spot rate moves to $1.460/?

4. Company A (a Japanese company) can borrow Japanese yen at fixed 8% or US dollars atfixed 10%.

Company B (an American company) can borrow Japanese yen at fixed 11% or US dollarsat fixed 7%.

Assume company A needs to borrow $10,000,000 to finance new construction in the USand company B needs to borrow the same amount in yen to pay for new equipment. Bothwould like to repay the loan in one year. The spot rate today is 125/$. The 360-dayforward rate is 127.

a. Assume company A had to borrow in US dollars, what amount would that be in yentoday?

b. What amount would company A need to repay in dollars at the end of the year?c. What would the cost of borrowing be to company A in Japanese yen?

d. Assume company B had to borrow in Japanese yen, what amount would that be indollars today?

e. What amount would company B need to repay in yen at the end of the year?f. What would the cost of borrowing be to company B in dollars?g. 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?