International Finance Market – Assignment #2 (Q. 1) Assume today’s settlement price on a CME EUR futures contract is $1.3140/EUR. You have a short position in one contract. Your performance bond account currently has a balance of $1,700. The next three days’ settlement prices are $1.3126, $1.3133, and $1.3049. Calculate the changes in the performance bond account from daily marking-to-market and the balance of the performance bond account after the third day.

Answer :
$1,700 + [($1.3140 - $1.3126) + ($1.3126 - $1.3133) + ($1.3133 - $1.3049)] x EUR125,000 = $2,837.50, where EUR125,000 is the contract size of one EUR contract.

(Q. 2)
Do problem 1 again assuming you have a long position in the futures contract.
Answer :
Solution: $1,700 + [($1.3126 - $1.3140) + ($1.3133 - $1.3126) + ($1.3049 - $1.3133)] x EUR125,000 = $562.50, where EUR125,000 is the contract size of one EUR contract.

(Q. 3) (MINI CASE: THE OPTIONS SPECULATOR)
A speculator is considering the purchase of five three-month Japanese yen call options with a striking price of 96 cents per 100 yen. The premium is 1.35 cents per 100 yen. The spot price is 95.28 cents per 100 yen and the 90-day forward rate is 95.71 cents. The speculator believes the yen will appreciate to $1.00 per 100 yen over the next three months. As the speculator’s assistant, you have been asked to prepare the following:

1. Graph the call option cash flow schedule. + -

2. Determine the speculator’s profit if the yen appreciates to $1.00/100 yen.
(5 x ¥1,000,000) x [(100 - 96) - 1.35]/10000 = $1,325.00.

3. Determine the speculator’s profit if the yen only appreciates to the forward rate.
Since the option expires out-of-the-money, the speculator will let the option expire worthless. He will only lose the option premium.
5*1.35 =
4. Determine the future spot price at which the