FINA 4512
Problem Set 1
Choose the best answer for each question. Answer all questions. http://www.encyclopedia.com/doc/1G2-3045001189.html
1) American Standard Co. has a 90 day £1 million receivable. American Standard’s bank, Bank of America, suggests a 90 day forward contract. American Standard sells forward £1 million. American Standard is: a) Hedging. b) Speculating. c) Locking in an arbitrage profit.
Answer: Part a) Hedging is the correct answer.
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2) American Standard Co. has a 90 day £62,500 receivable. American Standard’s bank, Bank of America, suggests a put option contract that matures in 90 days. American Standard purchases one put option contract, where one contract corresponds to a quantity of £62,500. American Standard is: a) Hedging. b) Speculating. c) Locking in an arbitrage profit.
Answer: Part a) Hedging is the correct answer. Because in this case, the American Standard Co is sure about the money to be received and wants to hedge against the exchange rate risk which is hedging.
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3) American Standard Co. has a 90 day £62,500 receivable. American Standard’s bank, Bank of America, suggests a call option contract that matures in 90 days. American Standard purchases one call option contract, where one contract corresponds to a quantity of £62,500. American Standard is: a) Hedging. b) Speculating. c) Locking in an arbitrage profit.
Answer: Part a) Hedging is the correct answer and not locking in an arbitrage profit, because in this case, the American Standard Co is sure about the money to be received and wants to hedge against the exchange rate risk which is hedging.
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4) Today’s spot price for gold is $1000. The 90 day
