1-) Assume that a U.S. based investor began applying a carry trade strategy by borrowing in the U.S. and investing in Turkey, as of December 2023. The corresponding interest rates are 3% in the U.S. and 40% in Turkey. The current spot rate between TL and USD is 29.2TL per USD. The strategy will be in place for a year, hence will end in December 2024. Note that the investor is taking an exchange rate risk here. If he decides to hedge some of that exchange rate risk via selling Turkish lira forward, what is the price range for the contract that is acceptable for her/him? 2-) Assume that a U.S.-based investor began applying a carry trade strategy by borrowing in the U.S. and investing in Turkey as of December 2023. The corresponding interest rates are 3% in the U.S. and 40% in Turkey. The current spot rate between TL and USD is 29.2TL per USD. The strategy will be in place for a year and will end in November 2023. Note that the investor is taking an exchange rate risk here. To hedge some of the exchange rate risk, he decided to buy a call option on USDTRY so that he would be able to buy USD in December 2024 at the strike price of the option. He chose an option with a strike price of 40 TL/$. For each of the following cases, calculate the
1-) Assume that a U.S. based investor began applying a carry trade strategy by borrowing in the U.S. and investing in Turkey, as of December 2023. The corresponding interest rates are 3% in the U.S. and 40% in Turkey. The current spot rate between TL and USD is 29.2TL per USD. The strategy will be in place for a year, hence will end in December 2024. Note that the investor is taking an exchange rate risk here. If he decides to hedge some of that exchange rate risk via selling Turkish lira forward, what is the price range for the contract that is acceptable for her/him? 2-) Assume that a U.S.-based investor began applying a carry trade strategy by borrowing in the U.S. and investing in Turkey as of December 2023. The corresponding interest rates are 3% in the U.S. and 40% in Turkey. The current spot rate between TL and USD is 29.2TL per USD. The strategy will be in place for a year and will end in November 2023. Note that the investor is taking an exchange rate risk here. To hedge some of the exchange rate risk, he decided to buy a call option on USDTRY so that he would be able to buy USD in December 2024 at the strike price of the option. He chose an option with a strike price of 40 TL/$. For each of the following cases, calculate the
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:1-) Assume that a U.S. based investor began applying a carry trade strategy by
borrowing in the U.S. and investing in Turkey, as of December 2023. The
corresponding interest rates are 3% in the U.S. and 40% in Turkey. The current spot
rate between TL and USD is 29.2TL per USD. The strategy will be in place for a year,
hence will end in December 2024.
Note that the investor is taking an exchange rate risk here. If he decides to
hedge some of that exchange rate risk via selling Turkish lira forward, what is the
price range for the contract that is acceptable for her/him?
2-) Assume that a U.S.-based investor began applying a carry trade strategy by
borrowing in the U.S. and investing in Turkey as of December 2023. The
corresponding interest rates are 3% in the U.S. and 40% in Turkey. The current spot
rate between TL and USD is 29.2TL per USD. The strategy will be in place for a year
and will end in November 2023.
Note that the investor is taking an exchange rate risk here. To hedge some of the
exchange rate risk, he decided to buy a call option on USDTRY so that he would be
able to buy USD in December 2024 at the strike price of the option. He chose an
option with a strike price of 40 TL/$. For each of the following cases, calculate the
payoff to this trade in USD terms without considering the premium paid for the
option.
a) TL/$ spot rate is 37.0 as of December 2024
b) TL/$ spot rate is 39.0 as of December 2024
c) TL/$ spot rate is 41.0 as of December 2024
d) TL/$ spot rate is 43.0 as of December 2024
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