Multinational Finance, EIE 2005/06, problem set - III

Question 1
Bush&Sons, the Polish furniture company, has USD 1,000,000 on liabilities. The payment is due in 60 days. Current
spot exchange rate is PLN 4.1400/USD. The company can buy call option on U.S. dollars at strike price
PLN 4.3400/USD and 0.7% premium. The company CFO believes that in six months spot rate can be expected at
PLN4.4000/USD. He decides to purchase and exercise the call option. Compute the final profit from this transaction (in
zlotys).

Question 2
A Polish importer has to pay USD 1,000,000 in a month for imported raw materials. Financial director plans to manage
the transaction exposure by purchasing the call option at PLN 4.8000/USD strike price and PLN 0.0500/USD premium.
The spot exchange rate is PLN 4.6000/USD. Find the spot rate for which exercising the option brings neither losses nor
gains.

Question 3
You are given the following information:

- Polish zloty quotes for British pound: spot PLN 6.6800/GBP, 3-month forward PLN 6.9900/GBP
- 3-month call option on pounds at strike price PLN 6.9950/GBP and premium PLN 0.0800/GBP

- 3-month put option on pounds at strike price PLN 6.9950/GBP and premium PLN 0.1830/GBP

a. Does put-call parity hold? Consider which of the options is overestimated or underestimated.
b. Consider the construction of synthetic forward position and taking an offsetting position on forward market.

What is the profit from this arbitrage?

Question 4
You wrote the put option on USD 1,000,000 at a strike price PLN 3.8000/USD and a premium of 300 basis points. The
spot exchange rate was PLN 3.7368/USD, but the following day zloty appreciated to PLN 3.7300/USD. If the same put
option was to be written the following day, the premium would be 310 basis points. Construct a delta-hedging strategy
to secure the contract.

Question 5 (homework 2)
The following quotes are available:
BEF/AUD
Spot exchange rate

25.00-05

3-month forward

24.87-93

6-month forward

24.68-76

3-month interest rates

3.00-3.25 (BEF) 5.00-5.25 (AUD)

6-month interest rates

3.50-3.75 (BEF) 6.00-6.25 (AUD)

Calculate exact to four decimal places synthetic 3- and 6-month forward exchange rates (bid and ask) and verify if
arbitrage is possible.