Blog

The equilibrium state in which covered interest arbitrage is no longer possible is called interest rate parity (IRP).

Carl is an option writer. In anticipation of a depreciation of the British pound from its current level of $1.50 to $1.45, he has written a call option with an exercise price of $1.51 and a premium of $.04. If the spot rate at the option’s maturity turns out to be $1.54, what is Carl’s profit or loss per unit (assuming the buyer of the option acts rationally)?

Blake Inc. needs €1,000,000 in 30 days. It can earn 6 percent annualized on a German security. The current spot rate for the euro is $1.00. Blake can borrow funds in the U.S. at an annualized interest rate of 5 percent. If Blake uses a money market hedge to hedge the payable, what is the cost of implementing the hedge?

You are a speculator who sells a put option on Canadian dollars for a premium of $.05 per unit, with an exercise price of $.86. The option will not be exercised until the expiration date, if at all. If the spot rate of the Canadian dollar is $.78 on the expiration date, your net profit per unit is:

Consider an MNC that is exposed to the Bulgarian lev (BGL) and the Romanian leu (ROL). 30% of the MNC’s funds are lev and 70% are leu. The standard deviation of exchange movements is 15% for lev and 10% for leu. The correlation coefficient between movements in the value of the lev and the leu is .85. Based on this information, the standard deviation of this two-currency portfolio is approximately:

The spot rate of British pound is quoted at $1.49. The 90-day forward rate exhibits a 2% premium. What is the 90-day forward rate of the pound?

The basic difference(s) between forward and futures contracts is that: (Select all that apply.)

Both call and put option premiums are affected by the level of the existing spot price relative to the strike price; for example, a high strike price relative to the spot price will result in a relatively high premium for a put option but a relatively low premium for a call option.

When you own ____, there is no obligation on your part; however, when you sell ____, there is an obligation on your part. (Select all that apply.)

Also known as the “central banks’ central bank,” the __________ attempts to facilitate cooperation among countries with regard to international transactions and provides assistance to countries experiencing a financial crisis.