Currency content analysis technique indicates Risky cashflow = X SFR + Y USD, with currency risk in the SFR/USD exchange rate. If the spot exchange rate is 9.26 SFR /USD, the corresponding cashflow is USD 15.3 milion. If the spot exchange rate is 7.58 SFR / USD, the corresponding cashflow is USD 16.5 million. Solving the system of two equations in two unknowns, the values of X and Y will be 9.88 million SFR and 50.2 million SFR 50 million SFR and 10 million USD 10 million SFR and 50 million USD 50.2 million SFR and 9.88 million USD

Currency content analysis technique indicates Risky cashflow = X SFR + Y USD, with currency risk in the SFR/USD exchange rate. If the spot exchange rate is 9.26 SFR /USD, the corresponding cashflow is USD 15.3 milion. If the spot exchange rate is 7.58 SFR / USD, the corresponding cashflow is USD 16.5 million. Solving the system of two equations in two unknowns, the values of X and Y will be 9.88 million SFR and 50.2 million SFR 50 million SFR and 10 million USD 10 million SFR and 50 million USD 50.2 million SFR and 9.88 million USD

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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8. Consider countries X and Y with risk-free rates of 8 and 10 percent, respectively. The future price (Currency X/ Currency Y) for a contract deliverable in 3 months is the same as the current exchange rate. Is there any arbitrage opportunity? If there is, design a strategy to exploit the arbitrage
What is the expected percentage change in the value of the foreign currency (e) if you combine all three techniques, which are equally weighted? Method Technical forecasting Fundamental forecasting Market-based forecasting O 0.3% O 4.6% O 4.7% 2.0% Forecasted e 2% -4% 8%
Peter Sheffield has Euros (€) amounting to €500,000 and is provided with the following quotes: Bank A: Euro/US dollar = €0.8418/$ Bank A: British pound /US dollar = £0.7538/S Bank B: British pound/Euro = £0.8863/€ Determine whether an arbitrage opportunity exists. Show your calculation in the space below and briefly explain (in one or two sentences) why the arbitrage opportunity exists or not. For example, show your calculation as follows (The currencies used in the example are not applicable to your calculation. It just provide you with information how you should show your calculation): Yen/ZAR = 11.7654/1.3954 = 8.4316 (Round your answer to 4 decimals) Reason why arbitrage opportunity exists/ does not exist:
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Lakonishok Equipment has an investment opportunity in Europe. The project costs €12 million and is expected to produce cash flows of €2 million in Year 1, €2.4 million in Year 2, and €3.5 million in Year 3. The current spot exchange rate is 1.35€/$ and the current risk-free rate in the United States is 2.8 percent, compared to that in Europe of 2 percent. The appropriate discount rate for the project is estimated to be 14 percent, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated €9 million. Use the exact form of interest rate parity in calculating the expected spot rates. What is the NPV of the project in U.S. dollars? (Do not round intermediate calculations and enter your answer in dollars, not in millions, rounded to two decimal places, e.g., 1,234,567.89) NPV I
Suppose the quotes for currencies in the three money centers are given as follows: At London center: 1GBP = 150 JPY At Tokyo center: 1USD = 115 JPY At New York center: 1USD = 0.86GBP An investor has 100,000 USD. Is there any opportunity for arbitrage? If yes, explain how does the investor use arbitrage to take advantage of these data? And how much could he or she earn from this?
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Lakonishok Equipment has an investment opportunity in Europe. The project costs €14 million and is expected to produce cash flows of €2.4 million in Year 1, €3 million in Year 2, and €3.9 million in Year 3. The current spot exchange rate is $1.39/€; and the current risk-free rate in the United States is 2.0 percent, compared to that in Europe of 2.5 percent. The appropriate discount rate for the project is estimated to be 12 percent, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated €9.4 million. Use the exact form of interest rate parity in calculating the expected spot rates. What is the NPV of the project in U.S. dollars? (Do not round intermediate calculations and enter your answer in dollars, not in millions, rounded to two decimal places, e.g., 1,234,567.89)

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