All examples of all lectures 2
Chapter 1 2
Chapter 2 3
Chapter 3 4
Chapter 5 4
Chapter 7 5
Chapter 8 6
Chapter 9 7
Chapter 10 8
Chapter 12 9
Chapter 13 11
Chapter 15 11
Questions Chapter 1,2,3,5 13
Questions Chapter 7, 8, 9, 10 16
Individual assignment 1 21
Individual assignment 2 23
,All examples of all lectures
Chapter 1
MC Questions:
- 1: For which currency (or currencies) has firm K a transaction exposure?
A) GBP, Dollar, Swiss Franc B) GBP, Dollar C) Dollar, Swiss Franc
- 2: For which currency (or currencies) has firm K an economic exposure?
A) GBP, Dollar, Swiss Franc B) GBP, Dollar C) Dollar, Swiss Franc
Exchange rate risk (transaction exposure)
- Example: a Dutch company (Oce) signs a contract to sell 10 machines to a company
in the USA for $10.000 / machine.
- Spot rate: S0 = $1.20 / €1
- Forward rate: F0 = $1.202 / €1 (in six month)
1. If Oce specifies the price in euros, the exchange rate risk is shifted to the US-firm
2. If Oce uses the forward market: Oce is sure it will receive:
- $10,000 * 10 / ($1.202 / €1) = €83,195
Example 1 call options: 21 January 2021: stock price Randstad = € 55.50
Call option 19 February (Third Friday in February)
- Exercise price € 56, Price call option (Premium) = € 1.50
- If on 19 February, Price Randstad = € 60
- Value of the call option: € 4.00 (Profit: € 4.00 - € 1.50 = € 2.50)
- If on 19 February, Price Randstad = € 51
- Value of the call option: € 0! (Loss: € 1.50)
NET Profit from purchasing a contract of 100 Randstad call options with a strike price of euro
56 (a)
NET Profit from selling a contract of 100 Randstad call options with a strike price of euro 56
(b)
(premium euro 1.50)
Example 2 put options: 21 January 2021: stock price Randstad = € 55.50
Put option 21 February (third Friday in February)
- Exercise price € 56, Price put option = € 2.00
- If on 19 February, Price Randstad = € 60
- Value of the put option: € 0 (Loss € 2.00)
- If on 19 February, Price Randstad = € 51
- Value of the put option: € 5.00 (Profit: € 5.00- € 2.00 = € 3.00)
,NET Profit from purchasing a contract of 100 Randstad put options with a strike price of euro
56 c)
NET Profit from selling a contract of 100 Randstad put options with a strike price of euro 56
d)
(premium euro 2.00)
Example: a Dutch company (Oce) signs a contract to sell 10 machines to a company in the
USA for $10.000 / machine.
Spot rate: S0 = $1.20 / €1
Buy put options to sell $100.000 for €0.83/$
And Pay Premium (Not specified)
A) in 6 months S = $1.25/ € (approx. €0.80 / $)
=> use your put options
B) in 6 months S = $1.15/ € (approx. €0.87 / $)
=> Don’t use your put options
Chapter 2
Example of a Futures Trade
- An investor takes a long position in 2 December gold
futures contracts on June 5
- 2 units, expired on 2 december, bought on
june 5
- contract size is 100 oz.
- futures price is US$900
- margin requirement (reserves) is
US$2,000/contract (US$4,000 in total)
- maintenance margin (back up of the back up,
when your reserves are gone) is
US$1,500/contract (US$3,000 in total)
- Possible outcomes
(2740: 4000-2600 + 1340)
,Chapter 3
Example:
When 30 is positive → long run buying, When 30 is negative → short run selling
Chapter 5
Short selling (an example)
You think Tesla is overvalued (the price is too high). If you have Tesla shares, you can sell it
(to your broker) if you think the price is too high.
But in this case you do not have Tesla:
- Investor Jan has Tesla share, and he has no plan for it in the next 6 months
- You can borrow the share from him, and return it to him in 6 months
- If you can't payback (you make a loss) and go bankrupt
- If you can payback (make profit)
- Jan will be fine with it since he still has Tesla share at the end (+ some
compensation)
1: Gold: An arbitrage opportunity?
Suppose that:
- The spot price of gold is US$1000
- The quoted 1-year futures price of gold is US$1100
- The 1-year US$ interest rate is 5% per annum
- Storage costs for gold is US$10 (paid up front).
- Is there an arbitrage opportunity?
Today:
1. Short a futures contract: you promise to sell gold at the price of $1100 in 1 year
2. You buy the gold today at the price of $1000.
3. You go to the bank and borrow 1010 (gold + storage cost) at the interest of 0.05
In one year:
1. Provide/ give back the gold to close the future position: +1100
2. Pay back the loan to the bank: 1010(1.05) = 1060.5
3. Net profit 1100-1060.50 = 39.50
, 2. Gold: An arbitrage opportunity?
Suppose that:
- The spot price of gold is US$1000
- The quoted 1-year futures price of gold is US$990
- The 1-year US$ interest rate is 5% per annum
- No income or storage costs for gold
- Is there an arbitrage opportunity?
Today:
1. Long future contract: I promise to buy gold at the price of $990 in one year
2. Short sell the gold for $1000
(You borrow the gold and sell it at a spot price on the market for 1000. And then after
a year you return it to the original owner)
3. You go to the bank and deposit for 0.05 a year
In one year
1. Take the money from the bank: $1000 x 1.05 = $1050
2. Close the long future contract: -$990 (you pay out $990)
3. Net profit: $1050 - $990 = $60 (so arbitrage option)
Chapter 7
Intel and Microsoft (MS) Transform a Liability (Figure 7.2, page 160)
Financial Institution is Involved (Figure 7.4, page 162)
Chapter 1 2
Chapter 2 3
Chapter 3 4
Chapter 5 4
Chapter 7 5
Chapter 8 6
Chapter 9 7
Chapter 10 8
Chapter 12 9
Chapter 13 11
Chapter 15 11
Questions Chapter 1,2,3,5 13
Questions Chapter 7, 8, 9, 10 16
Individual assignment 1 21
Individual assignment 2 23
,All examples of all lectures
Chapter 1
MC Questions:
- 1: For which currency (or currencies) has firm K a transaction exposure?
A) GBP, Dollar, Swiss Franc B) GBP, Dollar C) Dollar, Swiss Franc
- 2: For which currency (or currencies) has firm K an economic exposure?
A) GBP, Dollar, Swiss Franc B) GBP, Dollar C) Dollar, Swiss Franc
Exchange rate risk (transaction exposure)
- Example: a Dutch company (Oce) signs a contract to sell 10 machines to a company
in the USA for $10.000 / machine.
- Spot rate: S0 = $1.20 / €1
- Forward rate: F0 = $1.202 / €1 (in six month)
1. If Oce specifies the price in euros, the exchange rate risk is shifted to the US-firm
2. If Oce uses the forward market: Oce is sure it will receive:
- $10,000 * 10 / ($1.202 / €1) = €83,195
Example 1 call options: 21 January 2021: stock price Randstad = € 55.50
Call option 19 February (Third Friday in February)
- Exercise price € 56, Price call option (Premium) = € 1.50
- If on 19 February, Price Randstad = € 60
- Value of the call option: € 4.00 (Profit: € 4.00 - € 1.50 = € 2.50)
- If on 19 February, Price Randstad = € 51
- Value of the call option: € 0! (Loss: € 1.50)
NET Profit from purchasing a contract of 100 Randstad call options with a strike price of euro
56 (a)
NET Profit from selling a contract of 100 Randstad call options with a strike price of euro 56
(b)
(premium euro 1.50)
Example 2 put options: 21 January 2021: stock price Randstad = € 55.50
Put option 21 February (third Friday in February)
- Exercise price € 56, Price put option = € 2.00
- If on 19 February, Price Randstad = € 60
- Value of the put option: € 0 (Loss € 2.00)
- If on 19 February, Price Randstad = € 51
- Value of the put option: € 5.00 (Profit: € 5.00- € 2.00 = € 3.00)
,NET Profit from purchasing a contract of 100 Randstad put options with a strike price of euro
56 c)
NET Profit from selling a contract of 100 Randstad put options with a strike price of euro 56
d)
(premium euro 2.00)
Example: a Dutch company (Oce) signs a contract to sell 10 machines to a company in the
USA for $10.000 / machine.
Spot rate: S0 = $1.20 / €1
Buy put options to sell $100.000 for €0.83/$
And Pay Premium (Not specified)
A) in 6 months S = $1.25/ € (approx. €0.80 / $)
=> use your put options
B) in 6 months S = $1.15/ € (approx. €0.87 / $)
=> Don’t use your put options
Chapter 2
Example of a Futures Trade
- An investor takes a long position in 2 December gold
futures contracts on June 5
- 2 units, expired on 2 december, bought on
june 5
- contract size is 100 oz.
- futures price is US$900
- margin requirement (reserves) is
US$2,000/contract (US$4,000 in total)
- maintenance margin (back up of the back up,
when your reserves are gone) is
US$1,500/contract (US$3,000 in total)
- Possible outcomes
(2740: 4000-2600 + 1340)
,Chapter 3
Example:
When 30 is positive → long run buying, When 30 is negative → short run selling
Chapter 5
Short selling (an example)
You think Tesla is overvalued (the price is too high). If you have Tesla shares, you can sell it
(to your broker) if you think the price is too high.
But in this case you do not have Tesla:
- Investor Jan has Tesla share, and he has no plan for it in the next 6 months
- You can borrow the share from him, and return it to him in 6 months
- If you can't payback (you make a loss) and go bankrupt
- If you can payback (make profit)
- Jan will be fine with it since he still has Tesla share at the end (+ some
compensation)
1: Gold: An arbitrage opportunity?
Suppose that:
- The spot price of gold is US$1000
- The quoted 1-year futures price of gold is US$1100
- The 1-year US$ interest rate is 5% per annum
- Storage costs for gold is US$10 (paid up front).
- Is there an arbitrage opportunity?
Today:
1. Short a futures contract: you promise to sell gold at the price of $1100 in 1 year
2. You buy the gold today at the price of $1000.
3. You go to the bank and borrow 1010 (gold + storage cost) at the interest of 0.05
In one year:
1. Provide/ give back the gold to close the future position: +1100
2. Pay back the loan to the bank: 1010(1.05) = 1060.5
3. Net profit 1100-1060.50 = 39.50
, 2. Gold: An arbitrage opportunity?
Suppose that:
- The spot price of gold is US$1000
- The quoted 1-year futures price of gold is US$990
- The 1-year US$ interest rate is 5% per annum
- No income or storage costs for gold
- Is there an arbitrage opportunity?
Today:
1. Long future contract: I promise to buy gold at the price of $990 in one year
2. Short sell the gold for $1000
(You borrow the gold and sell it at a spot price on the market for 1000. And then after
a year you return it to the original owner)
3. You go to the bank and deposit for 0.05 a year
In one year
1. Take the money from the bank: $1000 x 1.05 = $1050
2. Close the long future contract: -$990 (you pay out $990)
3. Net profit: $1050 - $990 = $60 (so arbitrage option)
Chapter 7
Intel and Microsoft (MS) Transform a Liability (Figure 7.2, page 160)
Financial Institution is Involved (Figure 7.4, page 162)
