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International Finance Extra Credit 2Name:

This entire homework is worth 2 exam points. Attach/show your work for full credit.You are a trader in Brazil at the Bolsa exchange writing both Calls and Puts. Call and Put options are available on the US dollar with a strike of 2.2R/$ for a premia of .40R and .20R respectively. Assume each contract controls $100,000. Be sure to draw the payoff and profit/loss diagrams before answering the questions.1. Which breakeven point is correct? a. Call 2.0b. Put 2.4c. Call 2.4d. Put 1.8e. Put 2.0

2. If at maturity, the spot is 1.9R/$ at maturity, which option is exercised?a. Put, profit 10,000R

b. Call, payoff -30,000R

c. Call, payoff -10,000R

d. Put, payoff -30,000R e. None of the above

3. Suppose that the spot is 2.3R/$ at maturity, which is true?a. Call, payoff 10,000P

b. Put, loss 10,000Rc. Call, profit 30,000R d. Call, loss 30,000Re. None of the above4. Suppose that you will be receiving $1,000,000 on Feb 2 (about two months). Which option should you use to hedge its value in Brazilian Real, and what will your effective exchange rate be if on Feb 2, the spot 2.35 R/$. Forward is 2.2R/$.a. Call, 1.95

b. Put, 2.55c. Call, 2.60d. Put, 2.35

e. Put, 2.15

5. Assuming a forward rate of 2.2, at what realized spot would you have been indifferent between using the option in question 4, and a forward contract.

a. 2.6b. 2.5

c. 2.4

d. 2.3

e. 2.2

Firm A and Firm B are considering an interest rate swap. Firm A can borrow fixed at 7% or at Libor plus 100BP. Firm B can Borrow fixed at 8% or at Libor plus 250BP.

6. Which is statement is true?

a. Firm B has the absolute advantageb. Firm A has the comparative advantage in Fixed Ratesc. You can save the firms a total of 50BP if they swap d. You can save the firms a total of 150BP if they swape. Firm B can save 150 BP if it swaps7. If the firms swap, which of the following must be true?

a. Firm A will wind up paying Fixed

b. Firm B will wind up paying Fixed

c. Firm A will pay floating to B

d. Firm A will save 25BP

e. None of the above

8. If firm A agrees to pay 8% fixed to B, then what is the minimum payment that firm A is willing to receive from B?

a. 7% plus 50BPb. Libor minus 100c. Libor plus 100d. Libor plus 200e. Libor minus 200 _____________________________________________________________________It is January 1, the current spot is 2.2R/$. You are a US firm and owe one Million Real per year, due at year end, for the next two years. Your bank offers you a forward price of 2.42R/$ and 2.67R/$; alternatively you can swap with a Brazilian firm at a rate of 2.55R/$. Assume that you can borrow funds for 15% in Brazil, and 5% in the US. Also, the treasury rates in Brazil and the US are 12% and 3%.

9. To hedge the Real obligations, you should ________.a. Agree to buy Real forward

b. Agree to buy Dollars forward

c. Agree to swap paying Real and receiving Dollarsd. Agree to swap paying Dollars and receiving Real e. Agree to sell the Real forward10. What is the PV of the cash-flows for the lowest cost alternative?

a. Greater than $730,000b. $728,000-$730,000 c. $726,000-$727,999d. $720,000-$725,999e. Less than $720,00

11. What is the premium/discount in dollars using the existing forwards that you are paying in comparison to forwards determined by CIPC?

a. More than $20,000 premium

b. $15,000-$20,000 premium

c. $15,000 premium to a $15,000 discount

d. $15,000-$20,000 discount

e. More than a $20,000 discount______________________________________________________Suppose that the Real and Chilean Peso (CP) are about 80% (highly) correlated. The current spot, one and two year US dollar futures prices offered at Chiles exchange are: 600CP/$, 643CP/$, and 687CP/$, respectively. Each contract controls $50,000. Using information from the previous problem:

12. How could you best cross-hedge your Real cash-flows? a. Buy eight dollar futures contracts maturing each yearb. Sell eight dollar futures contracts maturing each yearc. Buy seven dollar futures contracts maturing each yeard. Sell seven dollar futures contracts maturing each yeare. Buy seven dollar futures contracts the first year and eight the second

13. The primary risk of using the cross hedge is ______.a. Hedged amount not equal to the cash-flowsb. Basis Riskc. Imperfect correlation between Real and CPd. Risk that the dollar devaluese. Risk that the dollar appreciates14. Suppose that your firm could borrow Real at Brazilian finance company for 14%, and purchase (invest in) Brazilian one and two year zero coupon treasuries for 89.28R and 79.72R (each pays 100R on maturity, providing a rate of return that you can easily compute). How could you execute a money market hedge of the one million Real per year obligation?

a. Borrow 1.65M Real from the finance company, and repay the obligation

b. Borrow 1.65M Real from the finance company, and purchase an equal number of treasuries maturing each year

c. Borrow 1.69M Real from the finance company, and purchase an equal number of Brazilian treasury bills maturing each year

d. Borrow approx. $768,200 from your US bank, and purchase an equal number of Brazilian treasury bills maturing each year

e. None of the above 15. If you wanted to use Real-dollar options sold at the Brazilian exchange to fully hedge downside risk, what should you do? Each contract controls $50,000.a. Sell Call options on the dollarb. Sell Put options on the dollarc. Buy Call options on the dollard. Buy put options on the dollare. None of the above_______________________________________________________________________