Question

A US Fl invested $100 million in one-year loans in Germany yielding 5%. At the beginning of the year, the spot rate was 1.147 $/€. To hedge against the currency risk, the US FI entered into a currency option with a strike rate of 1.135 $/€ and paid 1% premium. If the spot rate fell to 1.076 $/€ at the end of the year, what was the US FI's rate of return? Select one: a. 5.11% b. 3.90% c. 10.93% d. 2.90% e. 5.90%

Answer 1

The answer is d. 2.90%

$ 100 million. @ 5./ Spot 1.147 $16 x= 10135816 new spot = 1.076 $ 1E Invested $100 million. $101 M paid i.). premi un- $ 1 million. $100 1.147 (1.05) (1.135) 1 * $103.90 M 0 Convention Interected Conversion tot Earned back tos $103.90- $10 $ 101 ~ 2.90%. d. 2.90% Ans!