International finance Essay Example | Topics and Well Written Essays - 1250 words

International finance - Essay Example receiving 51.5 million USD, it is forced to pay 1 million USD to the counterparty to settle the forward and this means it will only keep (51.5 million – 1 million) = 50.5 million USD. The company would have gained if the rate went against the forward rate by an equal margin of 0.02 USD/Euro. A forward contract essentially locks in the exchange rate, no matter what happens, and depending on which way the market subsequently moves it can be beneficial or detrimental. (a) Intrinsic value of a call option may be calculated as; In the case of a Call Option:  Ã‚  Ã‚  Ã‚  Ã‚   Underlying Price  - Strike Price = Intrinsic Value. Therefore, the intrinsic values of the stocks priced at $55, $50, $45 will be as follows; As can be observed from the table, the intrinsic value of the call option with a strike of $50 remains at zero until the stock starts to trade above the strike price. The call intrinsic value is greater than zero; therefore, it rises and continues rising as the stock starts to move away from the strike price to the upside. Which is; (0.06-0.05)*(90/360)*1 million = $2,500. This interest saving of 2,500 will not come until the end of the 90-day LIBOR or Loan period. Therefore, the value at settlement is calculated from the present value of these savings; If the floating rate happens to be less than the forward rate, the result will be, negative meaning the long will pay the short; this also happens when the current rate is less than the contract rate (Scott & Wellons 1995). Hence, money may be lost since borrowing could only technically take place at lower rate with the present rates than it is possible with contract rates. (a) The annual interest rate in the UK is 6.5% while that in the US is 5.2%; the interest rate in the US is lower than that in the UK by (6.5-5.2) = 1.3%. A reduction or lower interest rate will mean that the demand for US goods will be lower as compared to those of the UK goods by a percentage of 1.3%. This means a depreciation of the