Multinational Business Finance and Investment – Flashcards
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Definition: Foreign Exchange Market
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1) physical and institutional structure, money of one country is exchanged for that of another country 2) determination of the rate of exchange 3) place for physical completion of transactions
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Definition: Foreign Exchange
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the money of a foreign country (foreign currency bank balances, banknotes, checks and drafts) in relation to the home currency
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Definition: Foreign Exchange Transaction
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an agreement betweeen a buyer and a seller that a fixed amount of one currency will be delivered for some other cureency at a specific rate
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Functions of the FX market
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1) transfer purchasing power between countries 2) obtain or provide credit for international trade transactions 3) minimize exposure to the risks of exchange rates changing (by e.g. hedging)
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Name the market participants in FX market!
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1) Central banks and treasuries 2) Bank and nonbank FX dealers (private investors) 3) Individuals and firms 4) Speculators and arbitragers
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What is the main goal of bank and nonbank FX dealers?
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Make profit: buy at "bid" price and reselling it at a slightly higher "offer" or "ask" price -> market makers
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What is the main goal of Individuals and Firms?
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- conducting commercial and investment transactions, BUT not main goal
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What is the main goal of Central Banks and Treasuries in FX market?
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- support the value of their own currency - not making profit, but influencing FX value (benefit interest of citizens)-> willing loss takers
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Definition: Spot transaction
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a purchase in the interbank market of foreign exchange, with delivery and payment between banks to take place, normally, on the second following business day (day of settlement=value date) -> almost immediately executed
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Definition: Forward transaction
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requires delivery at a future value date of a specified amount of one curreny for a specified amount of another currency -> exchange rate: established at time of agreement -> payment and delivery: not until maturity
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Definition: Swap transaction
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simultaneous purchase and sale of a given amount of FX for two different value dates -> purchase and sale with same counterparty (TWO transactions) e.g. spot against forward
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Where are the hotspots for FX activity?
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London and NY (50% of all transactions)
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Definition: FX rate
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the price of one currency expressed in terms of another currency
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Definition: FX quotation
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a statement of willingness to buy or sell at an announced rate
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Definition: European term
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foreign curreny price of one dollar (SF/$)
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Definition: American term
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dollar price of a unit of foreign currency ($/SF)
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Which are the exeptions to the use of European terms for FX rates?
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- Euro - U.K. pound sterling (or other commonwealth currencies) - Options and futures, touristic sector
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Definition: direct quote
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home curreny price of a unit of foreign currency
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Definition: indirect quote
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foreign currency price of a unit of home currency
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Definition: bid
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price in one currency at which a dealer will buy another currency
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Definition: ask
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price at which a dealer will sell the other currency
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What are "terms of points"?
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- used for forward rates - difference between forward and spot rate
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Indirect quotation formula (percent-per-annum)
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(Spot-Forward)/Forward x 360/n x 100
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Direct quotation formula (percent-per-annum)
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(Forward-Spot)/Spot x 360/n x 100
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cross rate
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Exchange rate between two currencies implied by their exchange rates with a common third currency (e.g. (Yen/$)/(Mexican Peso/$))
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How does Interbank (triangular) Arbitrage work?
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exchanging of three currencies, if the cross rate implies a higher value of one currency than the direct exchange rate
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How can changes in spot exchange rates be measured?
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1) direct: (Ending rate- Beginning Rate)/Beginning Rate x 100 2) indirect: (Beginning rate - Ending rate)/ending rate x 100
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What is the difference between speculation and arbitrage?
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Arbitrage: simultaneous buying and selling of an asset on different markets to profit from small differences in prices -> hedging, limiting risk Speculation: attempt to profit from falling/rising prices, involves risk
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Definition: MNE
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A multinational enterprise is a unique institution that acts as a catalyst and facilitator of international trade and has operating subsidiaries, branches or affiliates located in foreign countries. Its success depends on its ability to recognize and benefit from imperfections in national markets for products, factors of production and financial assets.
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What is a transnational corporation?
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A MNE whose ownership is widely spread; managed from a global perspective (rather than national)
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What are the prerequisites for an MNE to reach their goal of "Creating Value"?
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1) open marketplace 2) high quality strategic management 3) access to capital
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Which are the assumptions in the "classical" Theory of Comparative Advantage?
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1) free trade 2) perfect competition 3) no uncertainty 4) costless information 5) no government interference
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Who are the inventors of the Theory of Comparative Advantage?
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Adam Smith (Wealth of Nations, 1776) and David Ricardo (On the Principles of Economy and Taxation, 1817)
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What is the difference between proactive and defensive investments?
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proactive: enhance growth and profitability defensive: deny growth and profitability to the firm's competitors
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Law of one price
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If identical products or services can be sold in two different markets and no restrictions exist on the sale or transportation costs of moving the product between markets, the product's price should be the same in both markets. (P$ x S) = P¥
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Name the eight possibilities for currency regimes.
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1) Exchange Arrangements with no separate legal tender 2) Currency board regimes 3) Fixed peg arrangements 4) Pegged rate within horizontal bands 5) Crawling Pegs 6) Exchange rates within Crawling bands 7) Managed floating with no pre-announced path for the exchange rate 8) independent/free floating
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What is the purpose of the "International Parity Conditions"?
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Economic theory that links FX rates, price levels and interest rates and therefore explains changes in FX rates (long run)
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What is the absolute PPP?
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Spot exchange rates are determined by the relative prices of similar baskets of products (Big Mac Index)
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What is RPPP?
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RPPP implies a change in the spot exchange (long run) by an equal but opposite change in the inflation differential between two countries (inflation in Japan is 4% lower than in USA, therefore the spot exchange rate and the yen would appreciate by 4%)
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What is Exchange Rate pass-through?
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The degree to which the prices of imported and exported goods change as a result of exchange rates changes.
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What is an important factor concerning pass-through?
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Price Elasticity of Demand (supports management in decisions on how far to let pass-through effects rise prices)
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What is the Fisher Effect?
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Nominal interest rates are equal to the required real rate of return plus compensation for expected inflation. (i=r+#)
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What is the international Fisher effect?
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Relationship between percentage change in spot exchange rate and the differential between comparable interest rates
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What is the Fisher Open?
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Spot exchange rate should change in an equal amount but in the opposite direction to the difference in interest rates between two countries. (S1-S2)/S2=i$-i¥
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What is a forward premium/discount?
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The percentage difference between the spot and the forward exchange rate (stated in annual percentage terms)
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What is Interest Rate Parity?
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IRP: the difference in the national interest rates for securities of similar risk and maturity should be equal to, but opposite in sign to, the forward rate premium or discount for the foreign currency (except for transaction costs)
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What is Covered Interest Arbitrage (CIA)?
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Recognize an imbalance, take advantage of the disequilibrium by investing in whichever currency offers the higher return on a covered basis.
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Arbitrage Rule of Thumb
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If the difference in interest rates is greater than the forward premium, invest in the higher interest yielding currency. If the difference in interest rates is less than the forward premium, invest in the lower interest yielding currency.
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What is uncovered interest arbitrage?
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Borrowing in countries with low interest rates, convert proceeds in currencies that offer much higher interest rates (uncovered: not at forward rate)
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What means unbiased prediction (concerning the forward/future spot rate)
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The forward rate will, on average, over- and underestimate the actual future spot rate in equal frequency and degree (sum equals zero)
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Which competitive factors can be easier accessed by large international firms (than local competitors)?
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- economies of scale - managerial and technological expertise - product differentiation - financial strength
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What key reasons exist for becoming an MNE?
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Seeking... 1) new markets 2) raw material 3) knowledge 4) political safety 5) production efficiency
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Name the three stages for becoming an MNE
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1) enter first international trade transactions 2) international contractual agreements (e.g. Franchising) 3) begin local manufacturing
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What is the so-called agency problem?
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Separation of ownership from management -> objectives may not be perfectly aligned
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What is "SWM"?
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Shareholder Wealth Maximization: a company's main goal; the operational risk can be diversified -> Anglo-American markets
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What are possibilities to deal with the agency problem in the SWM model?
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- use of stock options as part of managers' compensation - replacement by board of directors if management is too far away from SWM objectives (e.g. Impatient capitalism: focus on short-term financial gain)
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What is the "SCM" model?
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Stakeholder Capitalism Model Powerful stakeholders influence the company's decisions: Labour unions Governments (communities, environment) Banks -> non-Anglo-American markets
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What is the goal of SCM?
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- create sustainable profit with as much certainty as possible - inefficiency does not matter; total risk counts - long-term and loyal shareholders should influence corporate strategy
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What are good governance strategies?
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Focus the attention if the BoD on developing and implementing long-term growth and value strategy
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What are the Corporate Governance Target pursuant to the OECD?
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- protect shareholders rights - ensure equitable treatment of all shareholders - involve stakeholders - Safeguard disclosure and transparency - BoD shall be monitored and held accountable for their actions
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Name the three stages for becoming an MNE
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1) enter first international trade transactions 2) international contractual agreements (e.g. Franchising) 3) begin local manufacturing
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What are internal and external factors influencing corporate governance?
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Internal: officers of the corporation, BoD External: equity markets, debt markets, analysts, external regulators
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What are possible ways of corporate governance regimes?
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- market-based - family-based - bank-based - government affiliated
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What are key factors to "good GC"?
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- composition of the BoD - management compensation - corporate auditing - public reporting & disclosure
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What are possible outcomes of shareholder dissatisfaction?
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1) the past (remain dissatisfied) 2) walk-away (sell shares) 3) shareholder activism (change management) 4) maximum threat (initiate takeover)
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Which 3 operational goals should be balanced by an MNE?
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1) maximize consolidated after tax income 2) minimize global tax burden 3) best positioning of income, Cash flows and available funds (country + currency!)
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In what eras can the International Monetary System be divided into?
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1) Gold Standard (1867 - 1913) 2) Inter-War Years & WWII (1914-1944) 3) Bretton Woods (1974-1973) 4) Floating Exchange/Eclectic Currency Arrangement (1973-present)
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How was FX regulated during the Gold Standard (1867-1913)?
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- rate was set at which a currency could be converted into gold (fixed) - limited expansion due to limited supply of gold
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What characterizes the Inter-War Years & WWII (1914-1944)?
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- currencies were floating - dangerous short selling of weak currencies
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What is the purpose of the IMF?
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International Monetary fund (since Bretton Wood, 1944) - helps countries to defend their currencies against cyclical, seasonal or random occurences - assists countries with structural problems (condition: strategies to solve the problems)
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What is the purpose of the World Bank?
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International Bank for Reconstruction and Development - helped to fund post-war reconstruction - supports general economic development
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What are eurocurrencies and what is their purpose?
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- domestic currencies on deposit in another country - enables to hold excess corporate liquidity - source of short-term bank loans
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How is the interest rate for eurocurrencies set?
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LIBOR (London Interbank offered Rate) - widely accepted and updated daily
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How did FX develop under the Bretton Woods currency regime?
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- worked very well during reconstruction and world trade growth time - the system was "killed" because of large differences in monetary and fiscal policies, inflation rates and because of various currency shocks
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What are the three main IMF Exchange Rate Classifications?
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1) Hard Pegs 2) Soft Pegs 3) Floating Arrangements
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What are the pros and cons of a fixed exchange rate regime?
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+ stability in international prices + anti-inflationary nature - central banks need large FX reserves (hard currencies, gold) - rates are inconsistent with economic fundamentals
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What are the three corners of the "Impossible Trinity"?
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The "perfect currency" would possess these three attributes: 1) Monetary Independence 2) Exchange Rate Stability 3) Full Financial Integration
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What is the big problem faced by emerging markets concerning their choice of exchange rate regime?
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- have to choose between 2 extremes 1) Pure Float (independent monetary policies for the sake of extreme volatility in FX) 2) Currency Board/Dollarization (extreme control, no monetary independence, no possibility to issue money)
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When was the birth of the EMU?
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the EU Economic and Monetary Union was created in 1991, Maastricht, where a timetable was set to replace all currencies with the EURO
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What are the (positive) effects of the Euro zone for its member countries?
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1. cheaper transaction costs 2. risks and costs related to FX uncertainty are reduced 3. price transparency, price-based competition
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What is the BoP?
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Balance of Payments - measurement of all international economic transactions between the residents of a country and foreign residents - evaluates the general competitiveness of domestic industry - influenced by: GDP, employment/price levels, exchange and interest rates
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How can the competitiveness of a country be evaluated by BoP?
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- indication of pressure on a country's FX rate (gains or losses in trading or investment) - signal of the impostition or removal of controls in various sorts of payments - forecast of a country's market potential
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What are the main accounts of the BoP?
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1. Current Account 2. Capital Account 3. Financial Account (4. Net Errors and Omissions) (5. Reserves and Related Items)
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What are the two most important Fundamentals regarding the BoP?
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1) the BoP must balance 2) it is a cash flow statement
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What are the four subaccounts of the Current Account?
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1. Goods trade/Import and Export 2. Services (transportation, construction...) 3. Income (dividends, salaries,...) 4. Current transfers (gifts, grants,..)
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What are the three components of the Financial Account?
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1. direct investment (>10% shares, control over asset) 2. portfolio investment (<10%, no control, only profit interests) 3. other investments (credits, loans, deposits across borders)
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What are the main critical points concerning the theory of Comparative Advantage?
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- governement interference - direct flow of capital and technology nowadays - modern factors of production are way more numerous
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Which differences exist between MNEs and domestic companies?
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1. culture/history/instituions 2. Corporate Governance 3. FX risk 4. political risk 5. modification of domestic finance theories 6. modification of domestic financial instruments
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Definition: Eurocurrencies
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Domestic currencies of one country as a deposit in another country; regulated by Eurobank
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What are the purposes of Eurocurrencies?
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1) efficient and convenient money market device for holding excess corporate liquidity 2) major source of short-term bank loans to finance corporate working capital needs (including export and import financing)
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Advantages/disadvantages of fixed currency regimes
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+ price stability eases international trade + anti-inflationary due to strict monetary and fiscal policies - need for central banks to maintain large quantities of hard currencies / gold to defend the fixed rate - rates may become inconsistent with economic reality
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What are the convergence criteria of the EMU?
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- Nominal inflation rates (< 1,5% above average of lowest 3 members) - Long-term interest rates (< 2% above average of lowest 3 members) - Fiscal deficits (<3% of GDP) - Government debt (< 60% of GDP)
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What would be the adjustment mechanisms in case of a BoP surplus (fixed, free-floating regime)?
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fixed: accumulate additional foreign currency reserves in the Official Reserves Account (sell domestic currency) floating: demand > supply of domestic currency, value increases
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Describe the interaction of the GDP with the BoP (formula!)
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GDP = C + I + G + X - M C = consumption spending I = capital investment spending G = government spending X = exports of goods and services M = imports of goods and services
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Describe the different phases of the "J-Curve"-Adjustment.
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- Currency Contract Period: sudden devaluation; contracts are binding, uncertainty (growing trade deficit) - Pass-Through Period: FX changes are passed-through (partially) to relative product prices - Quantitative Adjustment Period: due to the changing prices, the demand of consumers is adjusted
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Equation of (U.S.) Trade Balance
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U.S. trade balance = (PX$ * QX) - (S$/fc * PMfc * QM) (Export prices are assumed to be in USD and import prices are denominated in foreign currency)
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Definition: Securitization
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Pooling loans into standardized securities backed by those loans, which can then be traded like any other security.(process of turning an illiquid asset into a liquid saleable asset)
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Definition: Mortgage Backed Security
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A type of asset-backed security that is secured by a mortgage, or more commonly a collection ("pool") of sometimes hundreds of mortgages.
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Definition: Asset Backed Security
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a security whose cash flows are backed by the principal and interest repayments of a collection of loans. ie credit cards, student loans and automobile loans
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Definition: CDO
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Collateralized Debt Obligations. A package of loans sold and resold again to financial institutions and investors. These CDO's are bought with an underestimated risk, and sold with that same underestimated risk to other global entities. The CDO in a summary is: 1. a derivative instrument created from bank-originated mortgages and loans, 2. combined with similar debt obligations onto a portfolio 3. and then re-sold through investment banking underwriters to a variety of investors.
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Definition: SPV
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special purpose vehicles; conduits for packaging portfolios of receivables and selling them to investors in the money market; a recent innovation in financing trade credit
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Definition: Credit Default Swap
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An arrangement in which one party buys protection against the risk of default on a bond by paying an agreed premium to another party, the seller of protection, in return for which the protection seller agrees to compensate the protection buyer if the bond defaults.
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What were the 3 key problems of CDSs?
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1) no real record or registry of issuances 2) no requirement on writers and sellers that they had adequate capital to assure contractual fulfillment 3) no real market for assuring liquidity - depending on one-to-one counterparty settlement.
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Describe the 5 most driving factors which influence the FX rate pursuant to the asset market approach
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1) relative real interest rates 2) prospects for economic growth and profitability 3) Capital market liquidity 4) Political Safety 5) Contagion
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What does at-/in- or out-of-the-money mean?
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An option whose exercise price is the same as the spot price of the underlying currency is said to be at-the-money (ATM). An option that would be profitable, excluding the cost of the premium, if exercised immediately is said to be in-the-money (ITM). An option that would not be profitable, again excluding the cost of the premium, if exercised immediately is referred to as out-of-the money (OTM)
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Definition: Credit Risk
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possibility that a borrower's credit worthiness, at the time of renewing a credit, is reclassified by the lender (resulting in changes to fees, interest rates, credit line commitments or even denial of credit)
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Definition: Repricing
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risk of changes in interest rates charged (earned) at the time a financial contract's rate is reset
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Definition: FX Future
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future deliery of a standard amont of FX at a fixed time, price and place
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What means "short"/"long position" regarding futures contracts?
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short position: selling long position: buying of futures contract
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What are differences between futures and forward contracts?
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Size of contract (standardized vs individual); maturity; Location (organized exchanges vs individuals-banks); Margin/collateral (only required for futures); settlement (rarely vs often deliverd upon)
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Definition: FX Option
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the right, but not the obligation of a buyer, to buy or sell a given amount of foreign exchange at a ficed price per unit for a specified time period
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Definition: call
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option to buy foreign currency
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Definition: put
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option to sell a foreign currency
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What is the difference between an American and a European option?
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American: can be exercised anytime European: only at maturity
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What is ATM/ITM/OTM?
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at-the-money: exercise price is the same as the spot price of the underlying currency in-the-money: profitable option (excluding the cost of premium) out-of-the-money: not profitable (excluding the cost of premium)
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What is the "delta" sensitivity?
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the sensitivity of the option premium to a small change in the spot exchange rate
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What is the "theta" sensitivity?
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the expected change in the option premium from a small change in the time to expiration
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What is an FRA contract?
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Forward Rate Agreement: - lock in specific interest rate for a desired term - if above interest rate: the seller will pay the increased interest expense - if below interest rate: the buyer will pay the seller the differential interest expense
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Which kinds of Swaps (interest rate) exist?
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1) exchange fixed interest payments for floating interest payments (Interest Rate / plain vanilla swap) 2) Swap currencies of debt obligation
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What is the key motivation for currency swaps?
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replace cash flows scheduled in an undesired currency with flows in a desired currency
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What currency regimes are defined as "hard pegs"?
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Exchange arrangements with no separate legal tender: The currency of another country circulates as the sole legal tender or the member belongs to a monetary or currency union (e.g. European Union) Currency board arrangements: A monetary regime based on an implicit legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate (e.g. Bosnia Herzegowina pegged to Euro)
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What currency regimes are defined as "soft pegs"?
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conventional fixed peg arrangements: The country pegs its currency at a fixed rate to a major currency or basket of currencies, where the exchange rate fluctuates within a narrow margin (usually +/-1%) e.g. Macedonia Pegged exchange rates within horizontal bands: The value of the currency is maintained within margins of fluctuation around a formal or de facto fixed peg that are wider than +/- 1% the central rate e.g. Ukraine Crawling pegs: The currency adjusted periodically in small amounts at a fixed preannounced rate or in response to changes in selective indicators e.g. Costa Rica Exchange rates within crawling pegs: The currency is maintained within certain fluctuation margins around a central rate that is adjusted periodically at a fixed preannounced rate or in response to changes in selective indicators e.g. Poland
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What currency regimes are defined as "floating arrangements"?
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Managed floating with no pre-announced path: The monetary authority influences the movements of the exchange rate through active intervention in the foreign exchange market without pre-commitment (e.g. Slovenia) Independent floating: Exchange rate market-determined, with foreign exchange intervention just aimed at moderating fluctuations (e.g. USD,...)
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How did the Glass-Steagall Act contribute to the GFC?
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- elimination of the last barriers between commercial and investment banks, allowing commercial banks to enter areas of more risk, including underwriting and proprietary dealing - Investment banks were regulated by the Securities and Exchange Commission (SEC) - these banks invested in much riskier stocks and bonds (e.g. subprime debt) using their own equity and debt capital - not the deposits of customers
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Definition: FX exposure
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measure of the potential for a firm's profitability, net cash flow and market value to change because of a change in FX rates
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Definition: Transaction Exposure
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measures changes in the value of outstanding financial obligations incurred prior to a change in FX rates but not due to be settled until after the FX rates change (short-term); changes in cash flows that result from existing contractual obligations; reduce taxable income in the year they are realised
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Definition: Operating Exposure
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measures the change in the present value of the firm resulting from any change in future operating cash flows of the firm caused by an unexpected changes in FX rates (mid-/long-term); no underlying contract yet existing; reduce taxable income of a series of future years
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Definition: Translation Exposure
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the potential for accounting driven changes in the owners equity to occur because of the need to translate foreign currency financial statements of foreign subsidiaries into a single reporting currency to prepare worldwide consolidated financial statements; not deductible for tax concerns
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Definition: Hedging
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taking of a position, acquiring either a cash flow, an asset or a contract that will rise/fall in value and offset a fall/rise in the value of an existing position (protects owner from loss but eliminates gains)
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What are pros and cons concerning hedging?
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+ risk reduction eases planning; reduces risk of financial distress + Management knows currency risk of the firm and therefore has an advantage over shareholder; can take advantage of disequilibrium market conditions - expected CFs are not increased; benefit management at the expense of the shareholders (no increase of shareholder value) - shareholder are said to be much more capable of diversifying risk than the management - managers cannot outsmart the market
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What three stages can be defined in Transaction Exposure?
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1) Quotation Exposure (price setting to contractual agreement) 2) Backlog Exposure (contract signed until contract settlement) 3) Billing Exposure (contract settlement until contract payment => cash!!)
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What are the methods to hedge Transaction Exposure?
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1) contractual (forward, futures, options and money markets) 2) operating & financial hedges (risk-sharing agreements, leads and lags in payment terms, swaps)
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What is Natural/Financial Hedge?
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- Natural: off-setting operating CF, a payable arising from the conduct of business - Financial: off-setting debt obligation or financial derivative
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What are a company's alternatives for hedging transaction exposure?
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- do nothing - forward contract - hedge in money market - options
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What are possibilities to invest money into for gaining profit during hedging?
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- treasury bill (6% p.a.) - debt cost (8% p.a.) - cost of capital (12% p.a.)
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What is the equation for the future value of an option?
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FV(option)= contract size x premium x spot rate x interest rate (WACC)
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Where do Operating Cash Flows arise?
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Inter- and Intracompany Receivables, rent and lease payments, royalty and license fees
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Where do Financing Cash Flows arise?
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payments for loans (principal and interest), equity injections and dividends
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What are the six strategic corporate finance tools to manage operating exposure?
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1) Match currency CFs 2) Risk-Sharing Agreements 3) Back-to-Back or Parallel Loans 4) Currency Swaps 5) Leads and Lags 6) Reinvoicing center
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Definition: Matching currency CFs
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- aquire debt denominated in the currency where the corporation is exposed to FX rate changes - alternatively: seek out potential suppliers from that country (Natural Hedge) - alternatively: engage foreign suppliers to be paid in the currency (currency switching)
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Definition: Risk-sharing
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- contractual agreement in which both parties agree to "share" currency movement impacts (smooth impacts of volatile FX rates), usually if outside of agreed bandwidth
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Definition: Back-to-Back Loan
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- two business firms in separate countries borrow each other's currency for a specified period of time => indirect financing - but it is difficult to find a counterparty and there is a risk that one of the parties fails to return the borrowed funds
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Definition: Currency Swap
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- similar to Back-to-Back loan, but does not appear in balance sheet - firm deals with swap bank/dealer; a fee may be required for interest differential
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Definition: Leads and Lags
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lead: pay early before value drops lag: pay late because value is expected to increase
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Definition: Reinvoicing Center
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- reposition of the FX exposure to reinvoicing center - physical transaction still takes place, invoicing is "outsourced" => managing FX exposure for intrasubsidiary cash flows
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What is the use of "futures" for an MNE?
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- Permit firms to achieve payoffs that they would not be able to achieve without derivatives, or could achieve only at greater cost - Hedge risks that otherwise would not be possible to hedge - Make underlying markets more efficient - Reduce volatility of stock returns - Minimize earnings volatility - Reduce tax liabilities and motivate management (agency theory effect)
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What instruments can be used to hedge floating interest rates?
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- forward rate agreements - refinancing - interest rate futures - interest rate swaps
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How can the procentual over-/undervaluation in PPP be measured?
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(Implied Rate - Actual Rate) / Actual Rate
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How can a forward be calculated?
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S (fc/hc) x [ (1 + i (fc) x (90/360)) / (1 + i (hc) x (90/360))]
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How can the degree of pass-through be measured?
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% actual price increase / % FX rate changes
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What is the equation for IRP?
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(1 + i (hc) = S (fc/hc) x 1 + i (fc) x 1/ (F (fc/hc))
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Calculation for value at maturity (short position)
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- notional principle x (Spot- Futures)
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Call option (holder)
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Spot Rate - Strike price + premium
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Call option (writer)
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premium - (spot rate - strike price)
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put option (holder)
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Strike price - (spot rate + premium)
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Cost of option
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contract size x premium x spot rate x interest (WACC)
