UNIVERSITY OF SOUTH AFRICA
College of Accounting Sciences
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FIN4802: Finance & Investments
Assignment 01 — Semester 1, 2026
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FIN4802
Module Code:
Finance & Investments
Module Name:
01
Assignment Number:
662810
Unique Number:
21 May 2026
Due Date:
50
Total Marks:
Submitted in partial fulfilment of the requirements for FIN4802 — UNISA 2026
,UNISA | FIN4802 Currency Hedging Strategies
Question 1: Hedging Strategies for Jones Corp. (10 Marks)
Question: Assume that Jones Corp. (a U.S. firm) expects to receive 1 million Euros in 1
year. The spot rate of the Euro is $1.20. The 1-year forward rate of the Euro is $1.21. Jones
expects the spot rate of the Euro to be $1.22 in 1 year. Assume that 1-year options on Eu-
ros are available, with an exercise price of $1.23 and a premium of $0.04 per unit. The money
market rates are:
Rate Type United States Eurozone
Deposit Rate 8% 5%
Borrowing Rate 9% 6%
Table 1: Money Market Rates
Jones does not have any cash on hand.
1(a): Money Market Hedge (5 Marks)
Step 1: Determine the amount to borrow today in Euros.
Jones will receive e 1,000,000 in one year. To hedge using the money market, Jones borrows
an amount in Euros today that, with interest at the Eurozone borrowing rate of 6%, will equal
exactly e 1,000,000 in one year. Implying that:
Expected Euro receipts
Amount to borrow =
1 + rborrow, Euro
1,000,000 1,000,000
= =
1 + 0.06 1.06
= e943,396.23
Step 2: Convert the borrowed Euros to U.S. dollars at the current spot rate.
The borrowed e 943,396.23 is immediately converted to USD at the spot rate of $1.20 per
Euro:
USD proceeds = 943,396.23 × 1.20
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,UNISA | FIN4802 Currency Hedging Strategies
= $1,132,075.47
Step 3: Invest the USD at the U.S. deposit rate.
The $1,132,075.47 is invested in a U.S. money market account at the U.S. deposit rate of 8%
for one year:
USD at maturity = 1,132,075.47 × (1 + 0.08)
= 1,132,075.47 × 1.08
= $1,222,641.51
Step 4: Use the Euro receipt to repay the Euro loan.
In one year, Jones receives e 1,000,000 and uses it to repay the Euro loan:
Loan repayment = 943,396.23 × 1.06 = e1,000,000
The Euro obligation is fully settled.
Implementation Insight
Money Market Hedge Result: Jones Corp. receives $1,222,641.51 through the
money market hedge. This is guaranteed regardless of what happens to the spot rate in
one year, since the hedge locks in the conversion today.
1(b): Put Option Hedge (5 Marks)
Question: Determine the dollar cash flows to be received if Jones uses a put option hedge.
Jones buys put options on Euros. A put option gives the holder the right to sell Euros at the
exercise price. Since Jones will receive Euros, a put option protects against a fall in the Euro’s
value.
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,UNISA | FIN4802 Currency Hedging Strategies
Given information:
• Exercise price: $1.23 per Euro
• Option premium: $0.04 per Euro
• Expected spot rate in 1 year: $1.22 per Euro
• Euros to be received: e 1,000,000
Step 1: Determine whether to exercise the put option.
At maturity, the expected spot rate ($1.22) is below the exercise price ($1.23). Therefore,
Jones will exercise the put option, selling Euros at $1.23.
Revenue from exercising put = 1,000,000 × $1.23 = $1,230,000
Step 2: Subtract the cost of the put options.
The premium paid upfront is $0.04 per Euro, on 1,000,000 units:
Total premium cost = 1,000,000 × $0.04 = $40,000
Step 3: Calculate net dollar cash flow.
Net cash flow = $1,230,000 − $40,000
= $1,190,000
Critical Consideration
The option premium of $0.04 is paid today, not at maturity. In a precise analysis, the
premium should be compounded forward at the U.S. borrowing rate for one year to
reflect its true opportunity cost. Compounded: $40,000 × 1.09 = $43,600. Adjusted net
cash flow would therefore be $1,230,000 − $43,600 = $1,186,400. Where the question
does not specify compounding, $1,190,000 is the accepted answer.
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, UNISA | FIN4802 Currency Hedging Strategies
Question 2: Currency Options Net Payoffs (10 Marks)
2(a): Call Option on USD (11 Marks)
Question: A call option allows the holder to buy USD 100,000 at an exercise exchange rate
of 1.8000 (AUD/USD). The premium paid is 0.5 Australian cents per USD. Calculate the net
payoff at the following spot exchange rates.
Key parameters:
• Notional: USD 100,000
• Exercise rate (K): 1.8000 AUD/USD
• Premium: AUD 0.005 per USD (0.5 cents = 0.005 AUD)
• Total premium paid: 100,000 × 0.005 = AUD 500
The call option payoff formula is:
Net Payoff (AUD) = max(ST − K, 0) − Premium × Notional
where ST is the spot rate at expiry (AUD/USD).
Key Distinction
The rate is quoted as AUD per USD. A higher AUD/USD rate means the USD costs
more in AUD terms. The holder of this call option benefits when the AUD/USD spot
rate rises above 1.8000, because they can buy USD more cheaply (at 1.8000) than the
market price.
i. Spot Rate = 1.8040 AUD/USD
Step 1: Check whether the option is in-the-money.
ST = 1.8040 > K = 1.8000 ⇒ Exercise the call option.
Step 2: Calculate the gross payoff per USD.
Page 5 of 19
College of Accounting Sciences
⋄ ⋄ ⋄ ⋄ ⋄ ⋄ ⋄ ⋄ ⋄⋄
FIN4802: Finance & Investments
Assignment 01 — Semester 1, 2026
⋄ ⋄ ⋄ ⋄ ⋄ ⋄ ⋄ ⋄ ⋄⋄
FIN4802
Module Code:
Finance & Investments
Module Name:
01
Assignment Number:
662810
Unique Number:
21 May 2026
Due Date:
50
Total Marks:
Submitted in partial fulfilment of the requirements for FIN4802 — UNISA 2026
,UNISA | FIN4802 Currency Hedging Strategies
Question 1: Hedging Strategies for Jones Corp. (10 Marks)
Question: Assume that Jones Corp. (a U.S. firm) expects to receive 1 million Euros in 1
year. The spot rate of the Euro is $1.20. The 1-year forward rate of the Euro is $1.21. Jones
expects the spot rate of the Euro to be $1.22 in 1 year. Assume that 1-year options on Eu-
ros are available, with an exercise price of $1.23 and a premium of $0.04 per unit. The money
market rates are:
Rate Type United States Eurozone
Deposit Rate 8% 5%
Borrowing Rate 9% 6%
Table 1: Money Market Rates
Jones does not have any cash on hand.
1(a): Money Market Hedge (5 Marks)
Step 1: Determine the amount to borrow today in Euros.
Jones will receive e 1,000,000 in one year. To hedge using the money market, Jones borrows
an amount in Euros today that, with interest at the Eurozone borrowing rate of 6%, will equal
exactly e 1,000,000 in one year. Implying that:
Expected Euro receipts
Amount to borrow =
1 + rborrow, Euro
1,000,000 1,000,000
= =
1 + 0.06 1.06
= e943,396.23
Step 2: Convert the borrowed Euros to U.S. dollars at the current spot rate.
The borrowed e 943,396.23 is immediately converted to USD at the spot rate of $1.20 per
Euro:
USD proceeds = 943,396.23 × 1.20
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,UNISA | FIN4802 Currency Hedging Strategies
= $1,132,075.47
Step 3: Invest the USD at the U.S. deposit rate.
The $1,132,075.47 is invested in a U.S. money market account at the U.S. deposit rate of 8%
for one year:
USD at maturity = 1,132,075.47 × (1 + 0.08)
= 1,132,075.47 × 1.08
= $1,222,641.51
Step 4: Use the Euro receipt to repay the Euro loan.
In one year, Jones receives e 1,000,000 and uses it to repay the Euro loan:
Loan repayment = 943,396.23 × 1.06 = e1,000,000
The Euro obligation is fully settled.
Implementation Insight
Money Market Hedge Result: Jones Corp. receives $1,222,641.51 through the
money market hedge. This is guaranteed regardless of what happens to the spot rate in
one year, since the hedge locks in the conversion today.
1(b): Put Option Hedge (5 Marks)
Question: Determine the dollar cash flows to be received if Jones uses a put option hedge.
Jones buys put options on Euros. A put option gives the holder the right to sell Euros at the
exercise price. Since Jones will receive Euros, a put option protects against a fall in the Euro’s
value.
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,UNISA | FIN4802 Currency Hedging Strategies
Given information:
• Exercise price: $1.23 per Euro
• Option premium: $0.04 per Euro
• Expected spot rate in 1 year: $1.22 per Euro
• Euros to be received: e 1,000,000
Step 1: Determine whether to exercise the put option.
At maturity, the expected spot rate ($1.22) is below the exercise price ($1.23). Therefore,
Jones will exercise the put option, selling Euros at $1.23.
Revenue from exercising put = 1,000,000 × $1.23 = $1,230,000
Step 2: Subtract the cost of the put options.
The premium paid upfront is $0.04 per Euro, on 1,000,000 units:
Total premium cost = 1,000,000 × $0.04 = $40,000
Step 3: Calculate net dollar cash flow.
Net cash flow = $1,230,000 − $40,000
= $1,190,000
Critical Consideration
The option premium of $0.04 is paid today, not at maturity. In a precise analysis, the
premium should be compounded forward at the U.S. borrowing rate for one year to
reflect its true opportunity cost. Compounded: $40,000 × 1.09 = $43,600. Adjusted net
cash flow would therefore be $1,230,000 − $43,600 = $1,186,400. Where the question
does not specify compounding, $1,190,000 is the accepted answer.
Page 4 of 19
, UNISA | FIN4802 Currency Hedging Strategies
Question 2: Currency Options Net Payoffs (10 Marks)
2(a): Call Option on USD (11 Marks)
Question: A call option allows the holder to buy USD 100,000 at an exercise exchange rate
of 1.8000 (AUD/USD). The premium paid is 0.5 Australian cents per USD. Calculate the net
payoff at the following spot exchange rates.
Key parameters:
• Notional: USD 100,000
• Exercise rate (K): 1.8000 AUD/USD
• Premium: AUD 0.005 per USD (0.5 cents = 0.005 AUD)
• Total premium paid: 100,000 × 0.005 = AUD 500
The call option payoff formula is:
Net Payoff (AUD) = max(ST − K, 0) − Premium × Notional
where ST is the spot rate at expiry (AUD/USD).
Key Distinction
The rate is quoted as AUD per USD. A higher AUD/USD rate means the USD costs
more in AUD terms. The holder of this call option benefits when the AUD/USD spot
rate rises above 1.8000, because they can buy USD more cheaply (at 1.8000) than the
market price.
i. Spot Rate = 1.8040 AUD/USD
Step 1: Check whether the option is in-the-money.
ST = 1.8040 > K = 1.8000 ⇒ Exercise the call option.
Step 2: Calculate the gross payoff per USD.
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