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.
$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.
Do problem 1 again assuming you have a long position in the futures contract.
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 ...view middle of the document...
(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.
4. Determine the future spot price at which the speculator will only break even.
ST = E + C = 96 + 1.35 = 97.35 cents per 100 yen.
Alpha and Beta Companies can borrow for a five-year term at the following rates:
Moody’s credit rating Aa Baa
Fixed-rate borrowing cost 10.5% 12.0%
Floating-rate borrowing cost LIBOR LIBOR + 1%
a. Calculate the quality spread differential (QSD).
: The QSD = (12.0% - 10.5%) minus (LIBOR + 1% - LIBOR) = .5%.
b. Develop an interest rate swap in which both Alpha and Beta have an equal cost savings in their borrowing costs. Assume Alpha desires floating-rate debt and Beta desires fixed-rate debt. No swap bank is involved in this transaction.
: Alpha needs to issue fixed-rate debt at 10.5% and Beta needs to issue floating rate-debt at LIBOR + 1%. Alpha needs to pay LIBOR to Beta. Beta needs to pay 10.75% to Alpha. If this is done, Alpha’s floating-rate all-in-cost is: 10.5% + LIBOR - 10.75% = LIBOR - .25%, a .25% savings over issuing floating-rate debt on its own. Beta’s fixed-rate all-in-cost is: LIBOR+ 1% + 10.75% - LIBOR = 11.75%, a .25% savings over issuing fixed-rate debt.
Do problem 1 over again, this time assuming more realistically that a swap bank is involved as an intermediary. Assume the swap bank is quoting five-year dollar interest rate swaps at 10.7% - 10.8% against LIBOR flat.
: Alpha will issue fixed-rate debt at 10.5% and Beta will issue floating rate-debt at LIBOR + 1%. Alpha will receive 10.7% from the swap bank and pay it LIBOR. Beta will pay 10.8% to the swap bank and receive from it LIBOR. If this is done, Alpha’s floating-rate all-in-cost is: 10.5% + LIBOR - 10.7% = LIBOR - .20%, a .20% savings over issuing floating-rate debt on its own. Beta’s fixed-rate all-in-cost is: LIBOR+ 1% + 10.8% - LIBOR = 11.8%, a .20% savings over issuing fixed-rate debt.