FINC 439 – International Finance – CT Homework #2: Due Friday, Feb. 28
1) Assume you have calculated the forward premium on the Swiss franc using the formula for the direct quote: (F – S) / S x 12 / n .0153 x 2 = .0306 = 3.06% forward premium on the Swiss franc
The spot rate is U$1.120 /SF.
Show the 6-month forward rate on the Swiss franc as a function of the Spot rate and the forward premium (p) over six-months.
F = S(1+p) = 1.120(1.0306) = U$ 1.154
2) You would like to profit from exchange rate fluctuations by the use of currency futures contracts. The pound is currently trading at $1.66 / £, with a June futures contract trading at $1.62 / £. You believe the pound will be $1.70 / £ on June 18th. You will use 6 contracts. One contract covers £62,500.

A. If the exchange rate on June 18 for the pound turns out to actually be $1.70 / £, what is the profit you made on your bet.

Contract price = £62500 x $1.66/£ = $103750
Profit = 6 x $103750 x ($1.70/£ - $1.66/£) = $24,900
Contract Price = £62500 x 1.70/£ = $106250
Profit = 6 x $106,250 x (1.70/£ - $1.66/£) = $25500

Profit = 25500 – 24900 = $600

B. If you put down a 10% initial margin, what is your rate of return on this investment?
Initial margin = £103750 x .10 = $10,375
Rate of Return = $600/$10,375 = 57.83% C. Assume you did not have to put in any additional margin after initially entering the trade, how much money would you have in the Margin Account just before clearing out the account balance to $0?
$25500

3) Katherine Beroni works in the currency trading unit of Marconi Bank in Venice, Italy. Her latest speculative position is to profit from her expectation that the U.S. dollar will fall significantly against the Japanese yen (the yen will appreciate). The current spot rate is $0.0092/¥. She must choose between the