【正文】 ium Intrinsic Value = Time Value97 Sep Call Max[ – = , 0] = cents per 100 yen97 Sep Put Max[ – = , 0] = cents per 100 yen9. Assume spot Swiss franc is $ and the sixmonth forward rate is $. What is the minimum price that a sixmonth American call option with a striking price of $ should sell for in a rational market? Assume the annualized sixmonth Eurodollar rate is 3 189。 pays interest quarterly, has a principal balance of $100 million on June 30, 1998, 9/20/99 12/20/99 3/20/00 6/20/00 9/20/00b. Describe the strip hedge that Johnson could use and explain how it hedges the 12month loan (specify number of contracts). No calculations are needed.CFA Guideline Answera. The basis point value (BPV) of a Eurodollar futures contract can be found by substituting the contract specifications into the following money market relationship: BPV FUT = Change in Value = (face value) x (days to maturity / 360) x (change in yield) = ($1 million) x (90 / 360) x (.0001) = $25The number of contract, N, can be found by: N = (BPV spot) / (BPV futures) = ($2,500) / ($25) = 100 OR N = (value of spot position) / (face value of each futures contract) = ($100 million) / ($1 million) = 100 OR N = (value of spot position) / (value of futures position) = ($100,000,000) / ($981,750) where value of futures position = $1,000,000 x [1 – ( / 4)] 187。 175。 175。 9/20/99 12/20/99 3/20/00a. Formulate Johnson’s September 20 floatingtofixedrate strategy using the Eurodollar future contracts discussed in the text above. Show that this strategy would result in a fixedrate loan, assuming an increase in the LIBOR rate to percent by December 20, which remains at percent through March 20. Show all calculations.Johnson is considering a 12month loan as an alternative. This approach will result in two additional uncertain cash flows, as follows: Loan First Second Third Fourth payment initiated payment (9%) payment payment and principal 175。 175。 September 20 LIBOR = 7% December 20 LIBOR + 200 bps Loan First loan payment (9%) Second payment initiated and futures contract expires and principal 175。 Pay back principal September 20 LIBOR + 200 months plus interest basis points (bps) Borrow $100 million at CHAPTER 7 FUTURES AND OPTIONS ON FOREIGN EXCHANGESUGGESTED ANSWERS AND SOLUTIONS TO ENDOFCHAPTERQUESTIONS AND PROBLEMSQUESTIONS1. Explain the basic differences between the operation of a currency forward market and a futures market.Answer: The forward market is an OTC market where the forward contract for purchase or sale of foreign currency is tailormade between the client and its international bank. No money changes hands until the maturity date of the contract when delivery and receipt are typically made. A futures contract is an exchangetraded instrument with standardized features specifying contract size and delivery date. Futures contracts are markedtomarket daily to reflect changes in the settlement price. Delivery is seldom made in a futures market. Rather a reversing trade is made to close out a long or short position.2. In order for a derivatives market to function most efficiently, two types of economic agents are needed: hedgers and speculators. Explain.Answer: Two types of market participants are necessary for the efficient operation of a derivatives market: speculators and hedgers. A speculator attempts to profit from a change in the futures price. To do this, the speculator will take a long or short position in a futures contract depending upon his expectations of future price movement. A hedger, ontheotherhand, desires to avoid price variation by locking in a purchase price of the underlying asset through a long position in a futures contract or a sales price through a short position. In effect, the hedger passes off the risk of price variation to the speculator who is better able, or at least more willing, to bear this risk.3. Why are most futures positions closed out through a reversing trade rather than held to delivery?Answer: