1 Assume that the dollar-euro spot rate is $1.28. The six-month U.S. dollar
rate is 5% and the Euro interest rate is 4%. Under the continuous time,
what is the six-month forward rate implied from international parity
relation (IRP)?
a) $1.2929
b) $1.2864
c) $1.2736
d) $1.2673
Note: six-month
2 In the above question, suppose the volatility of the dollar-euro exchange
rate is 20%. Based on the European currency option pricing formula, what
is the current dollar price of a six-month ATM currency option written on
the euro? Please list the steps. You can leave your result up to N(d)
ATM, thus strike price is just the spot rate.
3 Suppose a U.S. company is scheduled to pay 100,000 pounds in one year.
This company wants to lock in the profit in dollars by using pound forward
that expires in one year. Suppose each pound forward contract is written
on 10,000 pounds. The company should
a) long one-pound forward contract
b) short one-pound forward contract
c) long ten-pound forward contract
d) short ten-pound forward contract
4 A U.S. importer needs to pay €62,500 in one year. Suppose the current
exchange rate is $1.25 = €1.00. The importer observes the following
quotations for euro options:
Listed Options
Amount
of
underlying
Euro
the Strike
$1.25 = €1.00
Price of the put
Price of the call
$0.075 per €
$0.01 per €
€62,500
Which of the following is the right strategy to hedge the risky euro payable?
a) Buy one call option contract
b) Buy one put option contract
Rationale: the importer should buy call options on euro to hedge the risky payable.
5 Consider a Chinese exporting company which receives $ from its business
partner at the US. The bad scenario for this Chinese company is thus ___
a) when dollar appreciates against RMB
b) when dollar depreciates against RMB
c) when RMB is pegged to dollar
d) None of the above
Rationale: The risk with the foreign currency receivable is when the foreign
currency ($ in this case) depreciates against the domestic currency
6 To hedge a foreign currency receivable, the hedger should take a ______
forward position if using the forward market hedge, or buy a ____ option
if using the option market hedge.
a) Long, call
b) Short, call
c) Long, put
d) Short, put
Rationale: The risk with the foreign currency receivable is when the foreign
currency depreciates against the domestic currency
7 A U.S. exporter has a €1,000,000 receivable due in one year. Suppose the
current exchange rate is $1.25 = €1.00. The importer observes the following
quotations for euro options:
Listed Options
Amount
of
the Strike
Price of the put
Price of the call
underlying
Euro
$1.25 = €1.00
$0.075 per €
$0.01 per €
€62,500
Which of the following is the right strategy to hedge the risky euro receivable?
a) Buy one call option contract
b) Buy 16 call option contracts
c) Buy one put option contract
d) Buy 16 put option contracts
Rationale: First, the exporter should buy put options on euro to hedge the risky
receivable. Second, exporter should buy 16 
€1,000,000
of such put options.
€62,500
8 In the above question, suppose one year later the exchange rate becomes
$1.4= €1.00. What is the U.S. exporter’s profit/loss from the hedged
position (relative to the initial euro exchange rate of $1.25/€)?
a) He has no profits or losses
b) $75,000, i.e., the exporter earns $75,000
c) -$7,500, i.e., the exporter loses $75,000.
Rationale: when euro appreciates against dollar, the importer will not exercise the put
option. His loss is the option premium that he paid upfront, which equals
0.075*1,000,000 = $75,000. On the other hand, the exporter earns
(1.4-1.25)*1,000,000=$150,000 from the euro receivable due to the euro appreciation.
The exporter thus earns $75,000 from the hedged position.
Another way to think about: the profit profile of the hedged position is like a call
option with the same strike price ($1.25 = €1.00) and the same option premium
($0.075 = €1.00). If the exchange rate rises to $1.4/€ at the expiration date, you will
exercise this synthetic call, and the total profit/loss (=terminal payoff-option premium)
is (1.4-1.25-0.075)*1,000,000=$75,000
9 An exporter can shift exchange rate risk to their customers by
a) Invoicing in their home currency
b) Invoicing in their customer’s local currency
c) Splitting the difference, and invoicing half of sales in local currency
and half of sales in home currency.
d) Invoicing sales in a currency basket