International Finance Solution

FINA 3020 International Finance ‐ Assignment 3 solutions 

Chapter 6 6. The net terminal value of one call contract is: [Max[ST – E, 0] – Ce] x JPY1,000,000/100 ÷ 100¢, where JPY1,000,000 is the contract size of one JPY contract. At 104: [Max[104 – 108, 0] – 1.55] x JPY1,000,000/100 ÷ 100¢ = -$155 At 106: [Max[106 – 108, 0] – 1.55] x JPY1,000,000/100 ÷ 100¢ = -$155 At 108: [Max[108 – 108, 0] – 1.55] x JPY1,000,000/100 ÷ 100¢ = -$155 At 110: [Max[110 – 108, 0] – 1.55] x JPY1,000,000/100 ÷ 100¢ = $45 At 112: [Max [112 – 108, 0] – 1.55] x JPY1,000,000/100 ÷ 100¢ = $245

7. The net terminal value of one put contract is: [Max[E –ST, 0] – Pe x JPY1,000,000/100 ÷ 100¢, where JPY1,000,000 is the contract size of one JPY contract. At 104: [Max[108 – 104, 0] – 0.98] x JPY1,000,000/100 ÷ 100¢ = $302 At 106: [Max[108 – 106, 0] – 0.98] x JPY1,000,000/100 ÷ 100¢ = $102 At 108: [Max[108 – 108, 0] – 0.98] x JPY1,000,000/100 ÷ 100¢ = -$98 At 110: [Max[108 – 110, 0] – 0.98] x JPY1,000,000/100 ÷ 100¢ = -$98 At 112: [Max[108 – 112, 0] – 0.98] x JPY1,000,000/100 ÷ 100¢ = -$98

8. Call: Intrinsic value = Max[ST – E, 0] = Max[1.49 – 1.50, 0] = 0 Time Value = Premium - Intrinsic Value = 1.55 – 0 = 1.55 cents Put: Intrinsic value = Max[ST – E, 0] = Max[1.50 – 1.49, 0] = 1 cent

Time Value = Premium - Intrinsic Value = 3.70 – 1 = 2.70 cents

9. A complete solution to this problem relies on the boundary expressions presented in footnote 3 of the text of Chapter 6. Ca ≥ Max[(70 - 68), (69.50 - 68)/(1.0175), 0] ≥ Max[ 2, 1.47, 0] = 2 cents

Mini Case 1. +

2. (5 x ¥1,000,000) x [(100 - 96) - 1.35]/10000 = $1,325.00. 3. Since the option expires out-of-the-money, the speculator will let the option expire worthless. He will only lose the option premium. 4. ST = E + C = 96 + 1.35 = 97.35 cents per 100 yen.  

Chapter 12 1a. Let us compute the necessary parameter values: E(P) = (.6)($2800)+(.4)($2250) = $1680+$900 = $2,580 E(S) = (.6)(1.40)+(.4)(1.5) = 0.84+0.60 = $1.44 Var(S) =...