1. Abu Dhabi Islamic Bank believes the New Zealand dollar will appreciate over the next thirty days from AED 3.50 to AED 3.65. The following annual interest rates apply:
Currency Lendine Rate Borrowine Rate
UAE Dirham 7.75% 8.50%
New Zealand dollar (NZ$) 7.50% 8.0%
Abu Dhabi Islamic Bank has the capacity to borrow AED 50,000. If Abu Dhabi Bank's forecast is correct, what will be its UAE dirham profit from speculation over the thirty days period? (Assume that it does not use any of its existing consumer deposits to capitalize on its expectations).
2. Assume that a speculator purchases a put option on British pounds (with a strike price of $1.50) for $.10 per unit. A pound option represents 31,250 units. Assume that at the time of the purchase, the spot rate of the pound is $1.51 and continually rises to $1.62 by the expiration date. Calculate the highest net profit or net loss possible for the speculator based on the information above.
3. Assume the spot rate of a currency is $.45 and the 180-day forward rate is $.40. Calculate at what percentage the forward rate is at a premium or at a discount.
4. A U.S. corporation has purchased currency call options to hedge 80,000 pound payable. The premium is $.10 for purchasing I pound, and the exercise price of the option is 1 pound = $.55. If the spot rate at the time of maturity is 1 pound = $.60, what is the total amount paid by the corporation if it acts rationally?
5. The spot rate for the Singapore dollar is $.78. The 90-day forward rate is 5.80. Calculate at what percentage the forward rate is at a premium or at a discount annually.
6. A firm wants to use an option to hedge 12.5 million in receivables from Australian firms. The premium is $.05. The exercise price is $.65. If the option is exercised, what is the total amount of dollars received (after accounting for the premium paid)?
7. You are a speculator who sells a call option on UK pound for a premium of $.06, with an exercise price of $.74. The option will not be exercised until the expiration date, if at all. If the spot rate of the UK pound is $.79 on the expiration date, calculate your net profit per unit, assuming that you have to buy UK pound in the market to fulfill your obligation.