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Florida International University Derivates Security Markets Questionnaire

 

Please read the attached slides and answer the questions. There is no minimum of words requires. Please answer the questions in Question/Answer format:

1.Explain the basic differences between the operation of a currency forward market and a futures market.

2.What is the major difference in the obligation of one with a long position in a futures (or forward) contract in comparison to an options contract?

3.What is meant by the terminology that an option is in-, at-, or out-of-the-money?

4.Discuss and compare the costs of hedging via the forward contract and the options contract.

5.What are the advantages of a currency options contract as a hedging tool compared with the forward contract?

6.Suppose your company has purchased a put option on the euro to manage exchange exposure associated with an account receivable denominated in that currency. In this case, your company can be said to have an ‘insurance’ policy on its receivable. Explain in what sense this is so.

7.Should a firm hedge? Why or why not?

8.IBM purchased computer chips from NEC, a Japanese electronics concern, and was billed ¥250 million payable in three months. Currently, the spot exchange rate is ¥105/$ and the three-month forward rate is ¥100/$. The three-month money market interest rate is 8 percent per annum in the U.S. and 7 percent per annum in Japan. The management of IBM decided to use the money market hedge to deal with this yen account payable.

a. Explain the process of a money market hedge and compute the dollar cost of meeting the yen obligation.

b. Conduct the cash flow analysis of the money market hedge.

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