Project description:
Question 1:
One year ago, you sold a put option on 100,000 euros with an expiration date of one year. You received a premium on the put option of $.04 per unit. The exercise price was $1.22. Assume that one year ago, the spot rate of the euro was $1.20, the one-year forward rate exhibited a discount of 2%, and the one-year futures price was the same as the one-year forward rate. From one year ago to today, the euro depreciated against the dollar by 4 percent.
Today the put option will be exercised (if it is feasible for the buyer to do so).
a. Determine the total dollar amount of your profit or loss from your position in the put option.
b. Now assume that instead of taking a position in the put option one year ago, you sold a futures contract on 100,000 euros with a settlement date of one year. Determine the total dollar amount of your profit or loss.
Question 2:
Assume that Canada decides to peg its currency (the Canadian dollar) to the U.S. dollar and that the exchange rate will remain fixed. Assume that Canada commonly obtains its imports from the U.S. and Mexico. The U.S. commonly obtains its imports from Canada and Mexico. Mexico commonly obtains its imports from the U.S. and Canada. The traded products are always invoiced in the exporting country”s currency. Assume that the Mexican peso appreciates substantially against the U.S. dollar during the next year.
a. What is the likely effect (if any) of the peso”s exchange rate movement on the volume of Canada”s exports to Mexico? Explain.
b. What is the likely effect (if any) of the peso”s exchange rate movement on the volume of Canada”s exports to the U.S.? Explain.
Question 3:
The inflation rate in Yinland was 14% last year. The government of Yinland just devalued its currency (the yin) by 40% against the dollar. Even though it produces similar types of products as the U.S., it has much trade with the U.S. and very little trade with other countries. It presently has trade restrictions imposed on all non-U.S. countries. Will the devaluation of the yin increase or reduce inflation in Yinland? Briefly explain.