1. Trade Restriction Effects on Exchange Rates. Assume that the Japanese governm
ID: 2664525 • Letter: 1
Question
1. Trade Restriction Effects on Exchange Rates.Assume that the Japanese government relaxes its controls on imports by Japanese companies. Other things being equal, how should this affect the (A) U.S. demand for Japanese yen? (B) Supply of yen for sale, and (C) equilibrium value of the yen?
2. Speculating with Currency put Options.
Alice Duever purchased a put option on British pounds for $ .04 per unit. The strike price was $ 1.80, and the spot rate at the time the pound option was exercised was $ 1.59. Assume there are 31.250 units in a British pound option. What was Alice’s net profit on the option?
3. Speculating with Currency call options.
LSU Corp. purchased Canadian dollar call options for speculative purposes. If these options are exercised, LSU will immediately sell the Canadian dollars in the spot market. Each option was purchased for a premium of $.03 per unit, with an exercise price of $.75. LSU will exercise the options at that time only if it is feasible to do so. In the following table, fill in the net profit (or loss) per unit to LSU Corp. base on the listed possible spot rate of the Canadian dollar on the expiration date.
Possible Spot Rate of Canadian Dollar on Expiration Date will be
$.76
.78
.80
.82
.85
.87
4. Intervention Effects on Corporate Performance.
Assume you have a subsidiary in Australia. The subsidiary sells mobile home to local consumers in Australia, who buy the home using mostly borrowed funds from local banks. Your subsidiary purchases all of its material from Hong Kong. The Hong Kong dollar is tied to the U.S. dollar. Your subsidiary borrowed funds from the U.S. parent, and must pay the parent $100,000 in interest each month. Australia has just raised it interest rate in order to boost the value of its currency (Australian dollar, A $). The Australian dollar appreciates against the U.S. dollars as a result. Explain, or have no effect on:
a. The volume of your subsidiary’s sales in Australia (measured in A $).
b. The cost to your subsidiary of purchasing materials (measured in A$).
c. The cost to your subsidiary of making the Interest payments to the U.S. parent (measure in A $) briefly explain each answer.
Explanation / Answer
1. If government relaxes restriction on import Exchange rate effects on U.S demand for japneese yen because japanese are in the postion of importing . 2. here option type: put (if exercise price lees than to strike price is called profit) strike price was = $1.80 and exercised at = $1.59 profit = 0.21 per unit less preminum = 0.04 per unit net profit = $0.17 per unit total profit = 31.25 * 0.17 =$5.3125 3. here premium = 0.03 exercised price =$ 0.75 if spot price are as like below ,the profit/loss are as follws strike price spot price premium profit or loss 0.75 0.76 0.03 -0.02 loss 0.75 0.78 0.03 0 no profit no loss 0.75 0.8 0.03 0.02 profit 0.75 0.82 0.03 0.04profit 0.75 0.85 0.03 0.07profit 0.75 0.87 0.03 0.09profit 4. The volume of your subsidiary’s sales in Australia (measured in A $). the volume of sales will be effected and the sales revenue would be increased when compare to past. becasue Australian currency has effected with the rarisng of interest rates. no effect for "B" and "c"..strike price spot price premium profit or loss 0.75 0.76 0.03 -0.02 loss 0.75 0.78 0.03 0 no profit no loss 0.75 0.8 0.03 0.02 profit 0.75 0.82 0.03 0.04profit 0.75 0.85 0.03 0.07profit 0.75 0.87 0.03 0.09profit
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