Problem 1: Interest rate effects on Exchange Rates. Assume that the U.S. interest rate fall relative too British interest rate. Other things being equal, how should this effect the (a) U.S. demand for British pounds (b) supply of pounds for sale, and (c) equilibrium value of the pound?
Problem 2: Factors Affecting Exchange Rates. What factors affect the future movements in the value of the euro against the dollar?
Problem 3: Factors Affecting Exchange Rates. If the Asian countries experience a decline in economic growth (and experience a decline in inflation and interest rates as a result), how will their currency values (relative to the U.S. dollar) be affected?
Problem 4: Speculating with Currency Call Options. Randy Rudecki purchased a call option on British pounds for $.02 per unit. The strike price was $1.45, and the spot rate at the time the option was exercised was $1.46. Assume there are 31,250 units in a British pound option. What was Randy's net profit on this option?
Problem 5: Selling Currency Put Options. Brian Tull sold a put option on Canadian dollars for $.03 per unit. The strike price was $.75, and the spot rate at the time the option was exercised was $.72. Assume Brian immediately sold off the Canadian dollars received when the option was exercised. Also assume that there are 50,000 units in a Canadian dollar option. What was Brian's net profit on the put option?
Problem 6: Forward versus Currency Option Contracts. What are the advantages and disadvantages to a U.S. corporation that uses currency options on Euros rather than a forward contract to hedge its exposure in Euros? Explain why an MNC may use Forward Contracts to hedge committed transactions and use currency options to hedge contracts that are anticipated but not committed. Why might forward contracts be advantageous for committed transactions, and currency options be advantageous for anticipated transactions?