A U.S. corporation has purchased currency call options to hedge a 70,000 pound payable. The premium is $.02 and the exercise price of the option is $.65. If the spot rate at the time of maturity is $.50, what is the total amount paid by the corporation if it acts rationally?

Realignment in the exchange rates of banks will eliminate locational arbitrage. More specifically, market forces will increase the ask rate of the bank from which the currency was bought to conduct locational arbitrage and will decrease the bid rate of the bank to which the currency was sold to conduct locational arbitrage.

Assume Countries A, B, and C produce goods that are substitutes of each other and that these countries engage in trade with each other. Assume that Country A’s currency floats against Country B’s currency, and that Country C’s currency is pegged to B’s. If A’s currency depreciates against B, then A’s exports to C should ____, and A’s imports from C should ____.

Forward contracts are usually liquidated by offsetting transactions, while futures contracts are usually liquidated by delivery of the currency.

The ____ the existing strike price relative to the spot price, the ____ valuable the put options will be.

Discuss the case against the single European currency.  In other words, what are the advantages of a multi-currency system that are obviously not realized with a single European currency?  (Hint: Under a multi-currency exchange rate system a change in the demand for a country’s output and investments results in an exchange rate change.  In contrast, how does a relative change in the demand for a country’s output and investments occur under the single European currency?)

Identify the following type of stylistic device: “Walking into my grandparents home when I was a child was like being wrapped in a giant security blanket.”

The equilibrium state in which covered interest arbitrage is no longer possible is called interest rate parity (IRP).

Carl is an option writer. In anticipation of a depreciation of the British pound from its current level of $1.50 to $1.45, he has written a call option with an exercise price of $1.51 and a premium of $.04. If the spot rate at the option’s maturity turns out to be $1.54, what is Carl’s profit or loss per unit (assuming the buyer of the option acts rationally)?

Blake Inc. needs €1,000,000 in 30 days. It can earn 6 percent annualized on a German security. The current spot rate for the euro is $1.00. Blake can borrow funds in the U.S. at an annualized interest rate of 5 percent. If Blake uses a money market hedge to hedge the payable, what is the cost of implementing the hedge?