PLEASE SHOW WORK! 1. A futures contract is available on Swiss francs (SF). A hed

Question

PLEASE SHOW WORK!

1. A futures contract is available on Swiss francs (SF). A hedger buys TWO March contracts. The futures price is $0.645/SF. Each contract is for 125,000 Swiss francs. In February, a month later, the contracts are sold. The futures price at this time is $0.6575/SF. What is the futures gain or loss?   

A loss of $3,125.00                          

A loss of $31,250.00                        

A gain of $312.50                             

A gain of $3,125.00

The spot exchange rate of Canadian dollars (C$) for 1 USD is quoted as $0.72USD/C$. What is the quote in terms of the Canadian dollar?

1.18C$/USD                       

1.39C$/USD                       

$0.72/C$                             

13.90C$/USD                     

None of the above is correct

You are evaluating investments in U.S. equities and Mexican equities. Your stock analysts anticipate that U.S. equities will appreciate 9% over the next year. Mexican equities are expected to rise by 15%. Your foreign exchange analyst expects the exchange rate for Mexican pesos, MP, to change from $0.14286/MP to $0.142015/MP. In U.S. dollar terms, what rate of return do you expect to earn on your Mexican equity investment?

14.32%                 

11.43%                 

10.25%                 

None of the above

Explanation / Answer

Futures contract

Answer for first question

Two month futures contract = $0.645/SF

One month later, one month futures contract = $0.6575/SF

Futures rate contract increase = $0.6575 – $0.645

                                                = $0.0125

Since Rate increase from two year contract to one year contract, so the in investor incur gain on the two month futures contract.

Gain for two contract of 125,000 SF from two month contract to one contract is calculated below:

Gain = 2 × 125,000 × $0.0125

         = $3,125.00

Investor incur gain of $3,125

Hence, Option (D) is correct answer,

Answer for second question

Spot exchange rate of Canadian dollars = $0.72USD/C$

So quote in terms of the Canadian dollar is calculated below:

Quote in terms of the Canadian dollar = 1/0.72

                                                                 = 1.39C$/USD   

Quote in terms of the Canadian dollar is 1.39C$/USD

Hence, option (B) is correct answer.

Answer for third question

Spot Exchange rate = $0.14286/MP

Future exchange rate = $0.142015/MP

Equity return in Mexico = 15%.

Suppose a US investor want to invest $100 in Mexico.

Peso value of $100 at spot rate of $0.14286/MP is calculated below:

Peso value = $100 / $0.14286/MP

                  = 699.99 MP

So investor will receive 699.99 MP in exchange of $100, which he invest in Mexican equity which give return of 15%.

So after one year value of investment in term of peso is calculated below:

Value of investment = 699.99 MP × (1+15%)

                                  = 804.98 MP

One year exchange rate is $0.142015/MP. SO total dollar value after exchange is calculated below:

Dollar value of investment = 804.98 MP × $0.142015/MP

                                            = $114.32

After one year total value of investment will be $114.32.

So total percentage return = ($114.32 / $100) – 1

                                           = 14.32%

Total Percentage return will be 14.32%.

Hence, Option (A) is correct answer.

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