Money, Banking, and International Finance

   1 +0.04 1 =0.3728

360

720

1 +e 1 = 1 +0.16

360

T

rd= 1 +if  









 











.

11. We used the approximation formula. Thus, the forward contract expects the U.S. dollar to
    appreciate with an exchange rate of 0.707 € / $1.

  0.707^ €^ $1

360

180

F 0.7^ €$1 1 +0.07 0.05 









  

Answers to Chapter 18 Questions.........................................................

1. Spot transactions occur when a buyer and seller agree to an exchange, and they exchange
   immediately. A forward transaction is a buyer buys a contract today for an asset that is sold
   in the future for a fixed price. Then the seller is obligated to sell the buyer the asset for the
   contract price.


2. Derivatives obtain their value from the asset that is specified in the contract.


3. Investors use hedging to protect themselves from future volatile prices. Speculators, on the
   other hand, buy and sell securities to earn quick profits. As you guessed, speculators can
   earn large profits or massive losses from the derivatives market.


4. Once an investor buys a futures contract, the buyer is obligated to buy the asset at the
   specified price (i.e. long position), while the seller is obligated to sell the asset at the
   specified price (i.e. short position).


5. Asset's price will fluctuate daily on the spot market. If the difference between the asset price
   and contract price exceeds a threshold, either the buyer or seller must deposit money with
   the broker. Margin helps guarantee parties will honor the contract.

6. Issuer deposits^10 ^1 ,^000 $^150 $^75 =$^750 ,^000 with the exchange because the holder can

buy petroleum via the futures and sell it on the spot market for a massive profit if the futures

matured today.

7. Value of the contract on the spot market equals (^) 150,000
   1

1

150,000 =$

euro

$

euro. Value of

the futures contract is $100,000

1.5

1

150,000 

euro

$

euros. Investor pays only $100,000 by

using the contract, instead of $150,000. Thus, the issuer deposits money into the margin

account.

8. Futures is a contract. Both the buyer and seller are obligated to carry through with the
   transaction. With the options contract, the holder chooses to exercise it or not.