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1. Alice 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 $1.70. Assume there are 31,250 units in a British pound option, what was Alice’s net profit on the option?
2. Assume the following information:
Value of the Canadian dollar in U.S. dollars: $0.90
Value of New Zealand dollar in U.S. dollars: $0.30
Value of the Canadian dollar in New Zealand dollars NZ $2.80
Given this information, is triangular arbitrage possible? If so, explain the steps that would reflect triangular arbitrage, and compute the profit from this strategy if you had $1 million to use.
USD/CAD=0.90

USD/NZD=0.30

Cross：NZD/CAD=0.9/0.3=3 but NZD/CAD=2.80,  3>2.8

So triangle arbitrage is possible. 1million/ 0.3=3.33 million，3.33million/ 2.8=1.19million， 1.19million* 0.9=1.07million, 1.07>1

Profit: 1.07-1=0.07 million
3. Assume the following information:
Spot rate of Brazilian real: $0.250
180-day forward rate of Brazilian real: $0.240
180-day Brazilian interest rate: 7%
180-day U.S. interest rate: 4%
Given this information, is covered interest arbitrage worthwhile for American investors to invest in the Brazilian deposit? Explain your answer.
4. You believe that the future value of the Thai Bhat will be determined by purchasing power parity (PPP). You expect that inflation in Thailand will be 9 percent next year, while inflation in the United States will be 3 percent next year. Today the spot rate of the Thai Baht is $.031. What is the expected spot rate of the Thai Baht in one year?
5. Assume that the three-year annualized interest rate in the United States is 5 percent and the three-year annualized interest rate in Brazil is 8 percent. Assume interest rate parity holds for a three-year horizon. Assume that the spot rate of the Brazilian real is $0.25. If the forward rate is used to forecast exchange rates, what will be the forecast of the Brazilian real’s spot rate in three years?
6. Assume that you obtain a quote for a one-year forward rate on the Argentinian peso. Assume that Argentina’s one-year interest rate is 50 percent, while the U.S. one-year interest rate is 10 percent. Over the next year, the peso depreciates by 25 percent. Do you think the forward rate overestimated the spot rate one year ahead in this case? Explain.
7. Assume the following information:
90-day U.S. interest rate: 3.4%
90-day Malaysian interest rate: 3.0%
90-day forward rate of Malaysian ringgit: $0.400
Spot rate of Malaysian ringgit: $0.394
Assume that the Delta Co. in the United States will need 300,000 ringgit in 90 days. It wishes to hedge this payables position. Would it be better off using a forward hedge or a money market hedge? Substantiate your answer with estimated costs for each type of hedge.
8. As treasurer of Sigma Corp. (a U.S. exporter to Australia), you must decide how to hedge (if at all) future receivables of 250,000 Australian dollars 90 days from now. Put options are available for a premium of $.03 per unit and an exercise price of $.70 per Australian dollar. The forecasted spot rate of the A$ in 90 days follows:
With the probability of 30%, future spot rate is $0.74
With the probability of 50%, future spot rate is $0.69
With the probability of 20%, future spot rate is $0.65
Given that you hedge your position with options, calculate the expected return of U.S. dollars to be received in 90 days based on the forecasted spot rate of the A$.