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Exam style questions and answers

24 The following options are held by Fred plc at their expiry date:

(1) A put option on GBP 500,000 in exchange for USD at an exercise price of
GBP 1 = USD 1.90. The exchange rate at the expiry date is GBP 1 =
USD 1.95.

(2) A call option on GBP 400,000 in exchange for Singapore Dollars at an
exercise price of GBP 1 = SGD 2.90. The exchange rate at the expiry date
is GBP 1 = SGD 2.95.

Which one of the following combinations (exercise/lapse) should be
undertaken by the company?

Put Call

A Exercise Lapse

B Exercise Exercise

C Lapse Exercise

D Lapse Lapse

25 Zed (a UK company) must pay EUR 1.5 million to a German supplier in six
months’ time. The treasurer of Zed has obtained the following information:

Spot rate GBP 1/EUR 1.2000 – 1.1910

EUR borrowing can be obtained at 4.0%p.a. and deposits pay 2.5%p.a.

GBP borrowing can be obtained at 5.0%p.a. and deposits pay 3.0%p.a.

Calculate the cost to Zed in GBP of a money market hedge, to the nearest
GBP. (Round calculations to the nearest GBP or EUR, at each stage of the
calculation).

26 P (a company) wishes to borrow $5 million in three months, for a period of six
months. A bank has quoted the following (Forward Rate Agreement) FRA
rates:

3 v 9 5.25 – 5.95

P can borrow at 0.50% above base rate, and the base rate is currently 5.00%.
Concerned that base rates may rise, P decides to take the FRA offered by the
bank.

At the settlement date for the FRA, base rate has risen to 6.00%.

What is the effective interest rate paid by P, for its borrowing? (Answer in
%, to 2 decimal places).

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