Question 2In 6-month from today, a U.S. based company will receive 2,000,000 Australian dollars (AUD) and thecompany wants to hedge the exchange rate risk. The expected AUD spot rate in 6-month will eitherappreciate by 5% (p.a) with 40% probability or depreciate by 10% (p.a.) with 60% probability. All ratesare continuous compounding (please round your answers to 4 decimals in the exchange rate calculations).As the financial manager of the company, you look at Bloomberg and collect the following information:• U.S. interest rate:..4% p.a.5% p.a.1 AUD=0.63 USDSpot rate:Call option premium 0.03 USD, with exercise exchange rate 1 AUD-0.65 USD and 6-monthmaturityPut option premium 0.02 USD, with exercise exchange rate 1 AUD-0.64 USD and 6-monthmaturityAustralian interest rate:1) Calculate the 6-month forward exchange rate, describe how a forward agreement can be used tohedge the receivable money, and calculate the resulting amount of USD in 6 months. 2) If the 6-month forward exchange rate is 1 AUD-0.65 USD, is there any arbitrage opportunity? Ifso, construct an arbitrage strategy based on 2,000,000 AUD in 6-month time and identify thearbitrage profit.3) Describe how an option can be used to hedge the receivable and calculate the expected amount ofUSD received in 6 months.4) Calculated the expected exchange rate and the expected amount of USD received without hedging.Based on the above analysis, compare the effectiveness of no-hedging, forward, and optionhedging strategies and outline their differences, advantages, and disadvantages.

Interest rate parity relationship Interest rate parity relationship dictates the forward exchange…

In 6-month from today, a U.S. based company will receive 2,000,000 Australian dollars (AUD) and the company wants to hedge the exchange rate risk. The expected AUD spot rate in 6-month will either appreciate by 5% (p.a) with 40% probability or depreciate by 10% (p.a.) with 60% probability. All rates are continuous compounding (please round your answers to 4 decimals in the exchange rate calculations) As the financial manager of the company, you look at Bloomberg and collect the following information: • U.S. interest rate: . 4% p.a. 5% p.a. 1 AUD=0.63 USD Spot rate: Call option premium 0.03 USD, with exercise exchange rate 1 AUD-0.65 USD and 6-month maturity Australian interest rate: ISD

In 6-month from today, a U.S. based company will receive 2,000,000 Australian dollars (AUD) and the company wants to hedge the exchange rate risk. The expected AUD spot rate in 6-month will either appreciate by 5% (p.a) with 40% probability or depreciate by 10% (p.a.) with 60% probability. All rates are continuous compounding (please round your answers to 4 decimals in the exchange rate calculations) As the financial manager of the company, you look at Bloomberg and collect the following information: • U.S. interest rate: . 4% p.a. 5% p.a. 1 AUD=0.63 USD Spot rate: Call option premium 0.03 USD, with exercise exchange rate 1 AUD-0.65 USD and 6-month maturity Australian interest rate: ISD

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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