HW #2 QUESTIONSANSWERSCompatibility ReportPROBLEM #1You are given the following information related to five different forward contract rates at different points in time. Consequently the interest rates and spot rates may differ for each scenario.You are looking to perform a covered arbitrage trade" where you identify mispriced forward rates (per IRP, Interest Rate Parity in the U.S. versus France) This is where you seek to borrow in the "cheaper" currency and lend the money in the "expensive" currency.To start off the problem you will want want to borrow one (1) million units of whichever currency is undervalued ($ or Euro).QUESTION A: Identify all the possible arbitrage opportunities. (NOTE: due to rounding, any trade which nets a profit of less than 2,000 dollars/Euros in profit is actually in equilibrium and not a trading opportunity).QUESTION B: For each covered arbitrage opportunity, identify the undervalued currency and the overvalued currency.QUESTION C: For each covered arbitrage opportunity, calculate the proper forward contract rate.QUESTION D: Choose any ONE covered arbitrage opportunity that you have found and describe in great detail (including dates, rates, amounts, what you are selling/buying) how you would undertake the arbitrage. NOTE: If you want to utilize the IRP "box" feel free to use it to assist you. That said, I will not interpret the box I just want to see your narrative on what is happening on Day 1 and the Final Day of the transaction.QUESTION E: For the arbitrage opportunity you choose in Question D, what was your profit? Again please note that if your profit is less than 2,000 dollars/Euros consider the foreward rate to be in equilibriumOne Month Three MonthForward ForwardMarket Values that are Given Contract ContractForward Rate ($/€) 1.60 1.92 Spot Rate ($/€) 1.60 1.80 Interest Rate (nominal) USD 6% 9%Interest Rate (nominal) Euro 6% 4%PROBLEM #2You believe that the Australia will depreciate against the US dollar.You want to utilize futures contracts to speculate on this move and take a position worth 500,000 AUD.One (1) contract = 100,000 AUDThe Spot Rate used when you open your position is $0.90/AUDThe following are the daily closing $/AUD rates used to calculate the value of your account.Margin Requirement (per contract) $4,000.00Maintenance requirement (per contract) $2,500.00 Open Account ($/AUD) 0.90Day 1 0.92Day 2 0.92Day 3 0.91Day 4 0.93Day 5 0.89Day 6 0.88Day 7 (Close Account) 0.87QUESTION A and B: What type of position would you take: Long or short? What actions will you need to take given your strategy? Be VERY specific.QUESTION C: How much profit/loss did you make during the seven trading days. Show your calculations.QUESTION D and E: On which days did you need to add money to your account? How much did you need to add on those days?PROBLEM #3A currency trader believes that the Euro will depreciate against the U.S. dollar. On June 10, he decides to invest in one futures contract (worth 125,000 Euros) with a September 15 settlement date.QUESTION A: Should he take a long or short position on the Euro? Why??QUESTIONS B AND C: In taking this position does he lock in the selling price or the purchase price? What is that price?The spot rate on June 10 is $1.2111/€.The September futures contract rate/price on, June 10 , is $1.2253/€The spot rate on September 15 is $1.2098/€QUESTION D: What is the trader's profit or loss on September 15? Show all calculations.QUESTION E AND F: If the trader had decided to offset his original contract (or close his position) on August 1, when the spot rate was $1.2122/€ and the September 15 contract rate was $1.2153/€, would he have a profit or loss, and how much was it? Show your calculations.PROBLEM 4Looking at the following options table:British Pound Option Prices (U.S. CENTS per Pound, 62,500 pounds per contract)US cents/£ CallSpot Rate Strike Price May144.8 144 0.88144.8 145 0.42144.8 146 0.2QUESTION A:Give me one example of an option that is out of the money? Be specific as far as month and strike price. Explain your answer?QUESTION B:Give me one example of an option that is in the money? Be specific as far as month and strike price. Explain your answer?QUESTION C:Which, if any, option is at the money? Explain your answer.QUESTION D:Looking at the in-the-money option you choose for Question B. Break down the premium into its Intrinsic Value and Time Premium components Show your calculations.QUESTION E and F:If you purchase two (2) June 145.0 call options what will be the total amount of your premium that you need to pay? When do you pay this premium: on the settlement date or on the date that you purchase the options?QUESTION G:Today you purchase three (3) June 144.0 Puts. On settlement date the spot rate = 142.5 cent per pound, what is your net profit/loss? Show your calculations.QUESTION H:Today you purchase two (2) June 144.0 Calls. On settlement date the spot rate = 143.5 cent per pound, what is your net profit/loss? Show your calculations.You are given the following information related to five different forward contract rates at different points in time. You are looking to perform a covered arbitrage trade" where you identify mispriced forward rates (per IRP, Interest Rate Parity in the U.S. versus France) This is where you seek to borrow in the "cheaper" currency and lend the money in the "expensive" currency.To start off the problem you will want want to borrow one (1) million units of whichever currency is undervalued ($ or Euro).Identify all the possible arbitrage opportunities. (NOTE: due to rounding, any trade which nets a profit of less than 2,000 dollars/Euros in profit is actually in equilibrium and not a trading opportunity).For each covered arbitrage opportunity, identify the undervalued currency and the overvalued currency.For each covered arbitrage opportunity, calculate the proper forward contract rate.Choose any ONE covered arbitrage opportunity that you have found and describe in great detail (including dates, rates, amounts, what you are selling/buying) how you would undertake the arbitrage. NOTE: If you want to utilize the IRP "box" feel free to use it to assist you. That said, I will not interpret the box I just want to see your narrative on what is happening on Day 1 and the Final Day of the