1. Biogen expects to receive royalty payments totaling £5 million next month. It is interested in protecting these receipts against a drop in the value of the pound. It can sell 30-day pound futures (futures contract size of £62,500 ) at a price of $1.6500 per pound or it can buy pound put options with a strike price of $1.6700 at a premium of 4.0 cents per pound. The spot price of the pound is currently $1.6500, and the pound is ex¬pected to trade in the range of $1.6250 to $1.7500. Biogen's treasurer believes that the most likely price of the pound in 30 days will be $1.6650.
a. How many futures contracts will Biogen need to protect its receipts? How many options contracts?
b. Diagram Biogen's profit and loss associated with the put option position and the fixtures position within its range of expected exchange rates. Ignore transaction costs and margins. Label all axes, and all S($/£1) prices.
c. Calculate Biogen's profit and loss associated with the put option position and the futures position within its range of expected exchange rates, including its most likely value. Ignore transaction costs and margins.
|
|
S=$1.6250
|
S=
|
S=
|
S=
|
|
|
OPTION
|
|
|
|
|
|
|
INFLOW
|
|
|
|
|
|
|
OUTFLOW
|
|
|
|
|
|
|
Premium
|
|
|
|
|
|
|
Exercise cost
|
|
|
|
|
|
|
POFIT/LOSS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FUTURES
|
|
|
|
|
|
|
INFLOW
|
|
|
|
|
|
|
OUTFLOW
|
|
|
|
|
|
|
PROFIT/LOSS
|
|
|
|
|
|
|
TOTAL gain/loss
|
|
|
|
|
|
2. Suppose that Bechtel Group wants to hedge a bid on a Japanese construction project But because the yen expostue is contingent on acceptance of its bid. Bechtel decides to buy a put option for the ¥15 billion bid amount (Its flan receivable) rather than sell it forward. In order to reduce its hedging cost. however. Bechtd simultaneously sells a all option for Ii IS billion with the same strike price. Bechtel reasons that it wants to protect its downside risk on the contract and is willing to sacrifice the upside potential in order to collect the all premium. Com¬ment on Bechtel's hedging strategy.
3. Company A, a French manufacturer, desires to bonow U.S. dollars at a fixed rate of interest for one year. Company B, a U.S. multinational. wishes to borrow euro at a fixed rate of Interest for one year. They have been uuaed the following rates per annum (adjusted for differential tax effects)
|
Company
|
Euro
|
US. Dollar
|
|
Companv A
|
10.6%
|
7.0%
|
|
Company 13
|
11%
|
6.2%
|
a) Design a swap that will net a bank, acting as intermediary, 20% of QSD (quality spread differential) per annum and that will generate a gain of 50% of QSD per annum for A and 30% of QSD for company B.
b) Suppose that the notional value of swap is $11 million and €10 million at the Initial spat exchange rate of S0(1.10/ €).
Calculate gains (losses) for the intermediary bank if the exchange rate will be ,S1($0.95/ €) one year from now.
