American X wishes to borrow U.S. dollars at a fixed rate of interest. Corporation Y wishes to borrow Japanese Yen at a fixed rate of interest. The amounts required by the two companies are the same at the current exchange rates. The following interest rates are listed adjusted for taxes: Yen Dollars Company X 6.0% 9.10 % Company Y 5.5% 11.20 % Create a swap that will net a bank 40 basis points per annum. Make sure the swap is equally attractive to both companies and foreign exchange risk is assumed by the bank.

American X wishes to borrow U.S. dollars at a fixed rate of interest. Corporation Y wishes to borrow Japanese Yen at a fixed rate of interest. The amounts required by the two companies are the same at the current exchange rates. The following interest rates are listed adjusted for taxes: Yen Dollars Company X 6.0% 9.10 % Company Y 5.5% 11.20 % Create a swap that will net a bank 40 basis points per annum. Make sure the swap is equally attractive to both companies and foreign exchange risk is assumed by the bank.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter7: International Arbitrage And Interest Rate Parity

Section: Chapter Questions

Problem 18QA

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Company A, a British manufacturer, wishes to borrow U.S. dollars at a fixed rate of interest. Company B, a U.S. multinational, wishes to borrow sterling at a fixed rate of interest. They were quoted the following rates per annum (adjusted for differential tax effects): Sterling US Dollars Company A 8.6% 7.65% Company B 7.8% 6.2% Design a swap that will net a bank, acting as intermediary, 15 basis points per annum and that will produce a gain of 25 basis points per annum for each of the two companies. Explain your answer in words and show the computations, and depict the swap rates in a flow chart
7.13. Company X wishes to borrow U.S. dollars at a fixed rate of interest. Company Y wishes to borrow Japanese yen at a fixed rate of interest. The amounts required by the two companies are roughly the same at the current exchange rate. The companies have been quoted the following interest rates, which have been adjusted for the impact of taxes: Company X Company Y Yen 5.0% 6.5% Dollars 9.6% 10.0% Design a swap that will net a bank, acting as intermediary, 50 basis points per annum. Make the swap equally attractive to the two companies and ensure that all foreign exchange risk is assumed by the bank.
XYZ Corporation, located in the United States, has an accounts payable obligation of ¥2250 million payable in six months to a bank in Tokyo. The current spot rate is ¥116/$1.00 and the six month forward rate is ¥109/$1.00. The annual interest rate is 3 percent in Japan and 6 percent in the United States. a) What is the future dollar cost of meeting this obligation using the money market hedge a. 19582168.89 b. None of the above ○ c. 6527389.63 O d. 13054779.26
XYZ Corporation, located in the United States, has an accounts payable obligation of ¥1500 million payable in six months to a bank in Tokyo. The current spot rate is ¥116/$1.00 and the six month forward rate is ¥109/$1.00. The annual interest rate is 3 percent in Japan and 6 percent in the United States. a) What is the future dollar cost of meeting this obligation using the money market hedge a. $92,307. b. $ 19582168.89 c. $13054779.26 d. $ 6589854.111
Assume the following information regarding U.S. and European annualized interest rates: Currency U.S. Dollar ($) 4.5% Investment Rate Borrowing Rate 5.5% Euro (€) 5.1% 6.3% Golden R Inc. can borrow either $6 million or €5 million. The current spot rate of the euro is $1.02. Furthermore, Golden R Inc. expects the spot rate of the euro to be $1.35 in 60 days. What is Golden R. Inc.'s dollar profit from speculating if the spot rate of the euro is indeed $1.35 in 60 days? Your answer should be whole US dollars. No decimals.
Assume that a bank has assets located in Germany worth €390 million earning an average of 6 percent. It also holds €190 in liabilities and pays an average of 4 percent per year. The current spot rate is €1.50 for $1. If the exchange rate at the end of the year is €2.00 for $1: a. What happened to the dollar? Did it appreciate or depreciate against the euro (€)?b. What is the effect of the exchange rate change on the net interest margin (interest received minus interest paid) in dollars from its foreign assets and liabilities?c. What is the effect of the exchange rate change on the value of the assets and liabilities in dollars?
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Assume that a bank has assets located in Germany worth €150 million earning an average of 8 percent. It also holds €100 in liabilities and pays an average of 6 percent per year. The current spot rate is €1.50 for $1. If the exchange rate at the end of the year is €2.00 for $1, ( LG 19-1) a. What happened to the dollar? Did it appreciate or depreciate against the euro (€)? b. What is the effect of the exchange rate change on the net interest margin (interest received minus interest paid) in dollars from its foreign assets and liabilities? c. What is the effect of the exchange rate change on the value of the assets and liabilities in dollars?
1. Assume that you can buy 250 Canadian dollars with 100 British pounds and you have 100 British pounds. The following exchange rates are available.Country U.S. $ Equivalent Currency per U.S. $Canada ? 1.3500U.K 1.8305 ? Complete the table above and compute how much profit, if at all, you can earn with triangle arbitrage? b) Assume the current spot rate is C$1.2103 and the one-year forward rate is C$1.1925. The nominal risk-free rate in Canada is 3 percent while it is 4 percent in the U.S. At what Canadian interest rate, there will be no possibility forprofitable arbitrage?
Assume that 90-day U.S. securities have a 3.5% annualized interest rate, whereas90-day Canadian securities have a 4% annualized interest rate. In the spot market,1 U.S. dollar can be exchanged for 1.4 Canadian dollars. If interest rate parity holds,what is the 90-day forward exchange rate between U.S. and Canadian dollars?
2. Money Market Hedge on Receivables Assume that Parker Company will receive 200,000 Canadian dollars in 360 days. Assume the following interest rates: 360-day borrowing rate 360-day deposit rate U.S. 6% 4% Canada 5% 3% Assume the forward rate of the Canadian dollar is $.80 and the spot rate of the Canadian dollar is $.78. If Parker Company uses a money market hedge, how much U.S. dollars will it receive in 360 days from its Canadian dollar receivable? (round to whole dollars) (2 points)
Suppose that Denver Financial Co. expects the exchange rate of the New Zealand dollar (NZ$) to depreciate from its current level of 0.5 to 0.45 in 30 days. Denver Financial seeks to capitalize on this potential opportunity. Suppose that Denver Financial begins by borrowing NZ$50,000,000 and converting it to U.S. dollars. The following table shows the short-term interest rates (annualized) in the interbank market. Currency Lending Rate Borrowing rate (Adjusted for 30-day period) (Adjusted for 30-day period) U.S. Dollars 6.72% 7.20% New Zealand Dollars (NZ$) 6.48% 6.96% After exchanging $50,000,000 to dollars, Denver Financial will have