Problem 1

on a particular day following rates are ruling in the market: USD/DKK spot
5.6920/30; 3 months: 100/200 and 6 months 150/50. state the option forwards
rate for spot - 3 months and 3 months - 6 months
We are given the following market rates:
 USD/DKK Spot Rate: 5.6920/5.6930
 3-month Forward Points: 100/200 (i.e., 0.0100/0.0200)
 6-month Forward Points: 150/50 (i.e., 0.0150/0.0050)
Step 1: Calculate the Outright Forward Rates
3-Month Forward Rate:
 Bid = Spot Bid + Forward Bid = 5.6920 + 0.0100 = 5.7020
 Ask = Spot Ask + Forward Ask = 5.6930 + 0.0200 = 5.7130
Thus, 3-month outright forward rate = 5.7020/5.7130
6-Month Forward Rate:
 Bid = Spot Bid + Forward Bid = 5.6920 + 0.0150 = 5.7070
 Ask = Spot Ask + Forward Ask = 5.6930 + 0.0050 = 5.6980
Thus, 6-month outright forward rate = 5.7070/5.6980

Step 2: Calculate the 3-Month to 6-Month Forward Swap Points

To find the forward points from 3 months to 6 months, we take the difference
between the 6-month forward rate and the 3-month forward rate:
 Bid Swap Points = 6-month bid - 3-month bid = 5.7070 - 5.7020 =
0.0050 (50 points)
 Ask Swap Points = 6-month ask - 3-month ask = 5.6980 - 5.7130 =
-0.0150 (-150 points)
Thus, the 3-month to 6-month forward swap points = 50/-150.

Problem 2:
Forward Rate Calculation Using Forward Points
On a particular day, the following exchange rates are observed in the market:
 Spot Exchange Rate (USD/INR): 82.00/82.20
 3-Month Forward Points: 50/100
 6-Month Forward Points: 120/180
Question:
Calculate the 3-month and 6-month forward rates.
Solution:
Forward rate is calculated as:
Forward Rate= Spot Rate + Forward Points / 10000
1. 3-Month Forward Rate
o Bid Rate: 82.00 + (50/10,000) = 82.0050

o Ask Rate: 82.20 + (100/10,000) = 82.2100

2. 6-Month Forward Rate

o Bid Rate: 82.00 + (120/10,000) = 82.0120

o Ask Rate: 82.20 + (180/10,000) = 82.2180

Final Answers:
 3-Month Forward Rate: 82.0050/82.2100
 6-Month Forward Rate: 82.0120/82.2180

Problem-3
today is 14th July and the spot exchange rate USD/INR = 79.00. an exporter is
expecting to receive USD 10,000 on 30th september. he is expecting USD to
depreciate and expects it to fall by about 5% in this period. realization of less
than USD/INR 77 would cause significant erosion of profit. a European put option
maturing 30th September with strike price of INR 78 is available at a premium
0.40. (a) State the way the exporter should hedge his receivable (b) if the
exporter hedges with options on above mentioned terms, state his realized
exchange rate if on 30th September the exchange rate happens to be (i) INR 81
(ii) INR 78 and (iii) INR 74

We are given the following data:

 Spot Rate (USD/INR) on 14th July: 79.00
 Expected USD Depreciation: 5%
 Expected INR/USD Rate after Depreciation: 79 × (1 - 0.05) = 75.05
 Exporter Receivable: USD 10,000 on 30th September
 Profit Erosion Threshold: USD/INR 77
 European Put Option Details:
o Strike Price: INR 78

o Premium: INR 0.40 per USD

 o Maturity: 30th September

(a) How the Exporter Should Hedge His Receivable

Since the exporter is expecting USD to depreciate, he should hedge his
receivable by buying a European Put Option with a strike price of INR 78.
This ensures a minimum selling price of 78 for his USD while allowing him to
benefit if the USD appreciates beyond 78.
 Total premium cost = 10,000 × 0.40 = ₹4,000.
 If INR depreciates (USD/INR rises above 78), the exporter can sell at
the market rate and lose only the premium.
 If INR appreciates (USD/INR falls below 78), he exercises the option
and sells at 78.

(b) Realized Exchange Rate Under Different Scenarios

The realized exchange rate depends on whether the exporter exercises the put
option or sells in the spot market.
Case (i): USD/INR = 81 (INR Depreciates)
 Since the market rate (81) is higher than the strike price (78), the
exporter will not exercise the option.
 He will sell USD at the market rate 81.
 But he loses the premium of ₹4,000.
 Net INR received = (10,000 × 81) - 4,000 = ₹810,000 - ₹4,000 =
₹806,000.
 Realized Exchange Rate = ₹806,000 ÷ 10,000 = ₹80.60 per USD.

Case (ii): USD/INR = 78

 Since the market rate (78) is equal to the strike price (78), the
exporter is indifferent between exercising the option or selling in the
market.
 He receives ₹78 per USD.
 But he loses the premium of ₹4,000.
 Net INR received = (10,000 × 78) - 4,000 = ₹780,000 - ₹4,000 =
₹776,000.
 Realized Exchange Rate = ₹776,000 ÷ 10,000 = ₹77.60 per USD.

Case (iii): USD/INR = 74 (INR Appreciates)

  Since the market rate (74) is lower than the strike price (78), the
exporter will exercise the option.
 He will sell USD at 78 instead of the lower market price 74.
 But he loses the premium of ₹4,000.
 Net INR received = (10,000 × 78) - 4,000 = ₹780,000 - ₹4,000 =
₹776,000.
 Realized Exchange Rate = ₹776,000 ÷ 10,000 = ₹77.60 per USD.

Exchange Rate Action INR Received Realized

on 30th Sep Taken (After Exchange Rate
Premium)

8 Sell at market ₹806,0 ₹80.6

1 rate 00 0
78 Either (No ₹776,0 ₹77.6
difference) 00 0
74 Exercise Put ₹776,0 ₹77.60
Option 00

Problem 4:
Hedging Currency Risk for an Exporter
Winsor Ltd., an Indian exporter, is expecting to receive USD 100,000 in
3 months from a U.S. buyer. The current spot exchange rate is USD/INR
82.00. However, the company fears that the rupee may appreciate,
reducing the value of its receivables.
To hedge against this risk, Winsor Ltd. buys a European put option with:
 Strike Price: INR 81.50
 Premium: INR 0.40
 Expiration: 3 months
Question:
What will be Winsor Ltd.’s effective realized rate if, at expiration, the
spot exchange rate is:
1. INR 83.00
2. INR 81.00
3. INR 80.00

Solution:
The exporter will either exercise the put option (if the exchange rate falls below
INR 81.50) or sell USD at the market rate (if the exchange rate is higher than INR
81.50).
Case 1: INR 83.00 (Market Rate is advantageous)
 Since the market rate (INR 83.00) is higher than the strike price (INR
81.50), the exporter will not exercise the option and will sell USD in the
open market.
 Effective rate = 83.00 - 0.40 (premium) = INR 82.60 per USD
 Total INR received: 82.60 × 100,000 = INR 8,260,000
 Best outcome for the exporter

Case 2: INR 81.00 (Market Rate is Below Strike Price)

 The exporter will exercise the put option and sell USD at INR 81.50.
 Effective rate = 81.50 - 0.40 (premium) = INR 81.10 per USD
 Total INR received: 81.10 × 100,000 = INR 8,110,000

Case 3: INR 80.00 (Market Rate Drops Further)

 The exporter will exercise the put option and sell USD at INR 81.50.
 Effective rate = 81.50 - 0.40 (premium) = INR 81.10 per USD
 Total INR received: 81.10 × 100,000 = INR 8,110,000
 The put option prevented further losses

Final Answer: Effective Realized Rates

Spot Rate (INR/USD) Action Effective Rate (INR/USD) Total INR Received

83.00 Market Sale 82.60 8,260,000

81.00 Put Option 81.10 8,110,000

80.00 Put Option 81.10 8,110,000

✅ The put option helped the exporter hedge against INR appreciation.

Problem 5:
Put Option for Speculation
A trader expects Tesla stock (TSLA) to fall from its current price of $250
per share over the next two months. The trader buys a put option with:
 Strike Price: $240
 Premium Paid: $5
 Lot Size: 100 shares
Question:
What is the trader's profit/loss if, at expiration, Tesla's stock price is:
1. $230
2. $240
3. $250
4. $260

Solution:
The trader will either exercise the put option or let it expire worthless depending
on the stock price.
Case 1: Stock Price = $230 (Profitable Situation)
 The trader exercises the put option and sells at $240, buying back at
$230.
 Profit per share: $240 - $230 = $10
 Total profit before premium: $10 × 100 = $1,000
 Net profit after premium: $1,000 - ($5 × 100) = $500

Case 2: Stock Price = $240 (Break-even Point)

 The trader exercises the put option and sells at $240.
 But since they can buy in the market at the same price ($240), there is no
gain.
 Total cost of option = $500, so Net Loss = -$500

Case 3: Stock Price = $250 (Option Expires Worthless)

 The trader does not exercise the option because selling at $240 is worse
than the market price of $250.
 Total loss = Premium Paid = -$500

Case 4: Stock Price = $260 (Worst Case Scenario)

  The put option expires worthless as selling at $240 is worse than $260.
 Total loss = Premium Paid = -$500

Final Answer: Profit/Loss Summary

Tesla Stock Profit per Total

Action
Price Share Profit/Loss

Exercise
$230 $10 $500
Put

Exercise
$240 $0 -$500
Put

$250 Do Nothing $0 -$500

$260 Do Nothing $0 -$500