Assume the following information:Current spot rate of New Zealand dollar = $.41Forecasted spot rate of New Zealand dollar six months from now = $.43Six month forward rate of the New Zealand dollar = $.44Six month interest rate on New Zealand dollars (annual rate) = 8%Six month interest rate on U.S. dollars (annual rate) = 9%What are the potential profits in USD or NZD from interest rate arbitrage if you can start with 1,000,000 USDor 1,000,000 NZD?a. 13.27%b. 5.87%c. 58340.20 NZDd. $115,271

To determine the potential profits from interest rate arbitrage, we need to consider the given…

Answered: Assume the following information:…

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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You expect that the rate of inflation next year in Australia will be 3% and in the United States will be 2%. The spot rate of the Australian dollar is US$0.75 and the one year forward rate is US$0.70. (a) Using purchasing power parity, calculate the expected change in the exchange rate for the Australian dollar. (b) Using your answer to (a), calculate the expected spot rate of the Australian dollar in one year.
Suppose you own a portfolio of British securities valued at $430,000. The exchange rate is currently at $1= £0.57. A currency futures contract on British pounds is set at 62,500 pounds. a. How many contracts must you purchase to protect your portfolio from exchange rate risk? b. Suppose 1 month after you purchase the contracts, the exchange rate changes to $1 = £0.59. What is your profit/loss in USD?
A financial institution has just sold 1,000,000 6-month European call options on the Japanese yen. Suppose that the spot exchange rate is 0.80 cents per yen, the exercise price is 0.81 cents per yen, the risk-free rate on the US dollar is 2.5% per annum, the risk-free rate in Japan is 0.5% per annum, and the volatility of the yen is 10% per annum. Calculate the delta (D), gamma (G), vega (n), theta (Q), and rho (r) of the financial institutions' position. Interpret with an explanatory sentence the meaning of each of the calculations.
Question Il: Suppose that the exchange rate is $0.92/e. Let rs= 4%, and re= 3%, u = 1.2, d = 0.9, T = 0.75, number of binomial periods = 3, and K = $1.00 Use Binomial Option pricing to answer the following two questions. (a) What is the price of a 9-month European call? (b) What is the price of a 9-month American call?
Due to high uncertainty in markets, the only quotes that are available for interest rates are 1-month quotes, that is, interest rates for one-month horizons. The monthly interest rates in the USA and Britain are, respectively, 1% and 1.5%. You seek to purchase the British Pound one-year, that is, 12-month forward. Given that the spot rate for the British Pound today is, $1.48 per pound, assuming satisfaction of Interest Rate Parity, what do you expect the forward quote for the delivery, in one year, of British Pounds to be?
Expected inflation in Argentina for next year is 64%. Expected inflation in Europe, for the same period, is 7.0%. Spot rate today is EUR/ARS=158.70. Using PPP, can you estimate the future spot rate in a year from now? (additional information: 1g of gold today=EUR54.94)
6. You are considering purchasing $20,000 worth of British pound denominated CDs. The current exchange rate is, 1 = $1.60. You plan on investing for six months. According to current forecasts, in six months time the exchange rate should be, 1 = $1.55. You desire a true 7% APR. What is the minimum pound CD APR you would require to make the investment (to the nearest basis point)?
Q1-13 If a speculator observes that the current 3-month forward rate on Swiss francs is 20¢ = 1 franc, but he/she expects that the spot rate in 3 months will be 30¢ = 1 franc, then this speculator would now a. buy dollars on the forward market. b. buy francs on the forward market. c. sell francs on the forward market. d. buy francs on the spot market and simultaneously sell francs on the 3-month forward market if the current spot rate is 25¢ = 1 franc.
Assume interest rates in the US are at 1.5% per year, and interest rates in Israel are at 6% per year, and that the shekel is trading at 4 sheckels/dollar. If the two-year forward rate on sheckels is 4.3 sheckels/dollar, do you want to invest in dollars or sheckels to maximize your returns for the next two years? How much would you make in arbitrage profits if you can borrow $10,000,000 or an equivalent amount of sheckels over this time period? What sheckel/dollar forward rate implies no arbitrage?
If the 3-month CD rate is 1.2% (annual) in Thailand and if the expected annual inflation is 5.7%, what is the real annual interest rate?
DVR Inc. can borrow dollars for five years at a coupon rate of 2.84 percent. Alternatively, it can borrow yen for five years at a rate of .94 percent. The five-year yen swap rates are 0.73–0.70 percent and the dollar swap rates are 2.50–2.53 percent. The currency ¥/$ exchange rate is 87.620. Determine the dollar AIC and the dollar cash flow that DVR Inc. would have to pay under a currency swap where it borrows ¥1,750,000,000 and swaps the debt service into dollars. Borrow: Swap:Provide accurate solution with explanation of all the requirements. Use excel calculations with excel formulas. Provide solution ASAP.
Use the following information for the next 8 questions. UCD (U.S. based MNC) will receive 250,000 euros in one year. The spot exchange rate today is $1.20 per euro. It observes that1. The one-year interest rate for euros is 8%, and the one-year interest rate for U.S. dollars is 3%.2. In the option market, there is one-year call option or put option available. Both options have the same exercise price of $1.18 per euro, and a premium of $0.02 per euro.3. In the forward market, the one-year forward rate exhibits a 5% discount from the current spot exchange rate. 4 If UCD decides to use options contracts to hedge its receivables, UCD shall

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