Fiancial Problem

EK International Financial Management: Problem Set 2   

Problem Set 1‐ Due April 17

Problem 1

A forward sale can be replicated by: (a) selling a put and buying a call. (b) selling a foreign T‐bill and buying a domestic T‐bill. (c) buying a put and selling a call. (d) both b and c (e) all of the above Draw the payoffs.

Problem 2

A put can be replicated by: (a) buying a call and selling foreign currency forward. (b) buying a foreign T‐bill and selling a call. (c) buying a domestic T‐bill, selling a foreign T‐bill, and buying a call. (d) both a and c (e) all of the above Draw the payoffs

Problem 3

A call can be replicated by: (a)buying foreign currency forward and buying a put. (b) buying a foreign T‐bill and selling a put. (c) buying a put, selling a domestic T‐bill, and buying a foreign T‐bill. (d) all of the above (e) none of the above Draw the payoffs

Problem 4

The forward price of a US dollar the first of August with delivery at the end of December is 0.94630 Euros. The forward price of a dollar to be delivered at the end of June next year is 0.95152 Euros. Assuming a flat term structure for both

EK International Financial Management: Problem Set 2   

countries and that the Euro interest rate is 4% a year‐what is the American rate of interest?

Problem 5

Assume today’s settlement price on a CME GBP futures contract is $1.8050/£. You have a short position in one contract. The size of the contract is £62,500. Your margin account currently has a balance of $2,200. The next three days’ settlement prices are $1.8058, $1.8011, and $1.7995. Calculate the daily changes in the margin account from daily marking‐to‐market and the balance of the margin account after the third day.

Problem 6

Assume that the euro is trading at a spot price of $1.49/€. Further assume that the premium of an American call (put)...