A currency dealer can borrow $1,110,000 (or the equivalent in euros) for one year. The one-year interest rateis 2.90% in the U.S. and 6.20% in the euro zone. The spot exchange rate is $1.3993/€1.00 and the one-yearforward exchange rate is $1.3368/€1.00. What arbitrage profit results if the trader borrows the maximumavailable funds?€62,635.70 OR $83,731.40€36,630.00 OR $48,966.98€18,585.78 OR $24,845.47€78,920.98 OR $105,501.57€11,985.50 OR $16,022.22€16,022.22 OR $21,418.50

Borrow $1,110,000Convert $ into Euros and get 1,110,000/1.3993 = Euros 793,253.77Invest and get…

Answered: forward exchange rate is $1.3368/€1.00.…

forward exchange rate is $1.3368/€1.00. What arbitrage profit results if the trader borrows the maximum available funds?

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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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?
Q2) Suppose the current one-year euro swap rate y0[0, 1] is 1.74%, and the two-yearand three-year swap rates are 2.24% and 2.55% respectively. Euro swap rates are quotedwith annual payments and 30/360 daycount (thus α = 1). A hedge fund(HF) executes the following two trades with a dealer:1(1) The HF pays fixed and receives floating on e100 million notional of a one-year swap atthe forward swap rate.(2) The HF receives fixed and pays floating on e100 million notional of a three-year swapat the forward swap rate.Assume bid-offer costs are negligible.a) After one year, what net cashflow has the dealer paid to (or received from) the HF?b) Suppose after one year, one-year and two-year euro swap rates are unchanged. What isthe current value of the remaining part of the HF trade?c) Suppose after one year, the one-year euro swap rate is unchanged but the two-year euroswap rate is now Y%. What value of Y gives a total zero profit on the trade (at T = 1)?d) Do you like the trades the HF…
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%
Find the hedge ratio a 1-period at-the-money put option on ¥300,000. The spot exchange rate is ¥100 = $1.00. In the next period, the yen can increase in dollar value by 15 percent or decrease by 10 percent. The risk-free rate in dollars is i$ = 5%; The risk-free rate in yen is i¥ = 1%. A.-0.44 B.-0.66 C.-0.60 D.-0.40
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.
Give Answer with calculation and also provide correct and incorrect option explanation
answer for part D
Assume a company needs to hedge payables. Which of the following conditions has to be met so a company would choose the options hedge? The break-even spot exchange rate is greater than the forward exchange rate. The break-even spot exchange rate is less than the forward exchange rate. The break-even spot exchange rate is less than the spot exchange rate. The break-even spot exchange rate is greater than the spot exchange rate.
Hedgers should buy calls if they are hedging an expected outflow of foreign currency. True or False ? Explain.
A(n). OOO futures hedge is most likely to result in ongoing payments over the life of the foreign exchange instrument. options money market forward
28) If we are using foreign currency for the NPV decision, all we have to do is restate all the ________ in terms of present value and use the current exchange rate. A) salvage value B) foreign incremental cash flow C) domestic incremental cash flow D) None of these
The US 1 year spot rate is 3.61% and the Mexican 1 year spot rate is 7.44%. A US investor purchases a Mexican corporate bond with an expected 1 year return of 9.76%, as measured in Mexican peso. The current USD/MXP exchange rate is 0.18. If the investor decides to hedge the currency risk exposure in the forward market, what would be the expected return on this portfolio, if interest rate parity holds?

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