1. The Turkish lira (TRY) was officially devalued by the Turkish government in F
ID: 2622452 • Letter: 1
Question
1. The Turkish lira (TRY) was officially devalued by the Turkish government in February 2001 during a severe political and economic crisis. The Turkish government announced on February 21 that the lira would be devalued by 20%. The spot exchange rate on February 20 was TRY68,000=1USD.
a. What was the exchange rate after the 20% devaluation?
b. Within three days the lira had plummeted to more than TRY100,000/1USD. What percentage change was this from the pre-devaluation rate?
c. Evaluate why the value of the TRY was different from the 20% devaluation sought by the government.
2. Assume that a call option on EUR is written with a strike price of USD1.25/EUR at a premium of 3.80 US cents per euro (USD0.038/EUR) and with an expiration date three months from now. This option is for EUR100,000. Calculate your profit or loss should you exercise before maturity at a time when the EUR is traded spot at:
a. USD1.10/EUR
b. USD1.18/EUR
c. USD1.25/EUR
d. USD1.32/EUR
e. USD1.35/EUR
f. USD1.43/EUR
Explanation / Answer
1.
a.
68000 + 20% * 68000 = 81600
new rate: 81600TRY = 1USD
b.
(100000-68000)/68000 * 100 = 47.06%
c.
Devaluation led speculators to short sell the currency hoping for a further devaluation or speculating that the foreign reserves of Turkey were low, which led to a steep fall of 47%.
2.
a. Loss = premium paid for the call as spot price is less than strike price
= 0.038 * 100000 = USD 3800
b. Loss = premium paid for the call as spot price is less than strike price
= 0.038 * 100000 = USD 3800
c. Loss = premium paid for the call as spot price is less than equal to strike price
= 0.038 * 100000 = USD 3800
d.
Profit = (1.32 - 1.25)*100000- 0.038 * 100000 = 7000 - 3800 = USD 3200
e.
Profit = (1.35 - 1.25)*100000- 0.038 * 100000 = 10000 - 3800 = USD 6200
f.
Profit = (1.43 - 1.25)*100000- 0.038 * 100000 = 18000 - 3800 = USD 14,200
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.