Actuarial Outpost > MFE #6 is E??
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#1
11-06-2008, 07:50 PM
 newhope Join Date: Nov 2007 Posts: 19
#6 is E??

I got E for #6. I think I used a put for the question.

Is the PAK D from a call?

Why it's a call instead of a put?
#2
11-07-2008, 09:03 AM
 colby2152 Note Contributor SOA Join Date: Feb 2006 Location: Virginia Studying for FA, GH Core College: PSU '07 Favorite beer: Oskar Blues Old Chub Scotch Ale Posts: 4,176

Quote:
 Originally Posted by newhope I got E for #6. I think I used a put for the question. Is the PAK D from a call? Why it's a call instead of a put?
For those of us who do not have photographic memories, what was the question?
#3
11-07-2008, 10:26 AM
 WilyCoyote Member Join Date: Apr 2008 Location: Long Island Studying for MLC Favorite beer: Too many to choose Posts: 32

Euro Car / Currency problem.
#4
11-07-2008, 10:58 AM
 Ballin Member Join Date: Jun 2008 Posts: 48

Quote:
 Originally Posted by colby2152 For those of us who do not have photographic memories, what was the question?
What I remember is that the car was 100,000 Euros and that the person would be receiving \$150,000 in one year. And he/she wanted to guarantee that they would have enough money for the car.

The current exchange rate was 1.5\$/E.

I do not remember the interest rates or the volatility.

I solved it as a dollar dominated put with strike 1.5\$/E and got E also!....
#5
11-07-2008, 11:12 AM
 actuaryrunner Member Join Date: Feb 2008 Location: Waverly, IA Studying for MLC College: Wartburg Posts: 55

I also solved it as a put and got E, but now think that it is a call.

The question said that he wanted to protect himself against the possible devaluing of the dollar. If the dollar devalues, it buys less Euros. For example, if the dollar devlaued, the exchange rate might be \$1.55/Euro at expiry. A call then pays off the difference, while a put wouldn't. So, when you look at it this way, it is actually a call, which will pay off when the exchange rate goes up (due to the devaluing of the dollar).

I missed it and I think I'm on the borderline. I'll kick myself if I fail with a 5 because of this question...
#6
11-07-2008, 12:00 PM
 Vomik Member Join Date: Aug 2007 Studying for Video Game Design Cert College: ITT Tech Posts: 3,961

He will be receiving \$150k dollars. If the exchange rate goes down then he will be able to convert to more Euro (good thing.) If the exchange rate goes up then he will convert to less Euro (bad thing.) Therefore he wants protection against upside risk, so he buys a call.
#7
11-07-2008, 03:15 PM
 Grace Liu Join Date: May 2008 Posts: 6

Mine is E as well...
#8
11-07-2008, 07:48 PM
 Final Fadeout Member Join Date: Aug 2004 Location: NYC Posts: 97

A dollar denominated put means you want to sell the other currency in favor of a stronger dollar, which isn't right here. I solved it as a euro denominated put and got D after converting. It says the same thing, that you want to sell your dollars for euros if the dollar goes down, so you sell it. Which is the same as saying you want to buy euros if you're worried they are going to go up. Heads I win, tails you lose....Except it probably would have been simpler to just value as a dollar denominated call on euros since there would have been less conversion involved.

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