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Question 2: Foreign Currency Derivatives (60 Marks) You work on the Currency Desk (department where Foreign Exchange is being traded) for a big investment bank. Your first assignment is to present a hedging strategy to your supervisor. You take the figure below in order to explain to her that you can insure against a depreciation of your home currency (US$). Explain in detail the graph below. (Hint: you might want to include in your answer all the right terminology; when to exercise this strategy, when to make a profit, maximum loss, etc.) Profit (U.S.$/SF) $0.030 $0.025 1 $0.020 $0.015 $0.010 $0.005 $0.000 0.555 Spot Rate (U.S.$/SF) 0.615 0.560 0.565 0.570 0.575 0.580 0.585 0.590 0.595 0.600 0.605 0.610 -$0.005 $0.010 -$0.015 -$0.020 Question 2: Foreign Currency Derivatives (60 Marks) You work on the Currency Desk (department where Foreign Exchange is being traded) for a big investment bank. Your first assignment is to present a hedging strategy to your supervisor. You take the figure below in order to explain to her that you can insure against a depreciation of your home currency (US$). Explain in detail the graph below. (Hint: you might want to include in your answer all the right terminology; when to exercise this strategy, when to make a profit, maximum loss, etc.) Profit (U.S.$/SF) $0.030 $0.025 1 $0.020 $0.015 $0.010 $0.005 $0.000 0.555 Spot Rate (U.S.$/SF) 0.615 0.560 0.565 0.570 0.575 0.580 0.585 0.590 0.595 0.600 0.605 0.610 -$0.005 $0.010 -$0.015 -$0.020

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