It is January 1st, 2020. A bank has five more years remaining in a currency swap according towhich it makes annual interest payments at the end of each year at an effective annual rateof 4% on a 10,000,000USD principal and receives annual interest payments at the end ofeach year at an effective annual rate of 5% on a 13,500,00OCAD principal. The currentUSDCAD exchange rate is 1.35, compute the value of this currency swap for the bank basedon the risk-free zero yields given below in continuously compounded form.所喃|1 year2.6%З year5 year2 year4 yearCAD2.8%3%3.1%3.2%USD3%3.3%3.6%3.8%4%

The value of a swap derivative contract is calculated as the difference between present value of…

Answered: It is January 1st, 2020. A bank has…

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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On September 30, 2020, Peace Frog International (PFI) (a U.S.-based company) negotiated a two-year, 3,300,000 Chinese yuan loan from a Chinese bank at an interest rate of 4 percent per year. The company makes interest payments annually on September 30 and will repay the principal on September 30, 2022. PEl prepares U.S. dollar financial statements and has a December 31 year-end. Relevant exchange rates are as follows: U.S. Dollar per Chinese Yuan (CNY) Date September $ 30, 2020 0.220 December 0.225 31, 2020 September 30, 2021 0.240 December 0.245 31, 2021 September 30, 2022 0.270 Prepare all journal entries related to this foreign currency borrowing. Taking the exchange rate effect on the cost of borrowing into consideration, determine the effective interest rate in U.S. dollars on the loan in each of the three years 2020, 2021, and 2022.
Use the following information for Problems 11 and 12.MNC Corp. (a U.S.-based company) sold parts to a South Korean customer on December 1, 2017, with payment of 10 million South Korean won to be received on March 31, 2018. The following exchange rates apply:MNC’s incremental borrowing rate is 12 percent. The present value factor for three months at an annual interest rate of 12 percent (1 percent per month) is 0.9706.Assuming that MNC entered into a forward contract to sell 10 million South Korean won on December 1, 2017, as a fair value hedge of a foreign currency receivable, what is the net impact on its net income in 2017 resulting from a fluctuation in the value of the won?a. No impact on net income.b. $58.80 decrease in net income.c. $2,000 decrease in net income.d. $1,941.20 increase in net income.
Six-month T-bills have a nominal rate of 3%, while default-free Japanese bonds that mature in 6 months have a nominal rate of 1.50%. In the spot exchange market, 1 yen equals $0.008. If interest rate parity holds, what is the 6-month forward exchange rate? Do not round intermediate calculations. Round your answer to six decimal places. A
Currently, the USD/MXN rate is 19.5300 and the three-month forward exchange rate is 20.8400. The three-month interest rate is 3.3% per annum in the U.S. and 6.3% per annum in Mexico. Assume that you can borrow MXP10,000,000 or its equivalent in USD. How much do you make/lose if you borrow locally and invest abroad? (USD, no cents)
On July 1, 2020, Mifflin Company borrowed 200,000 euros from a foreign lender evidenced by an interest-bearing note due on July 1, 2021. The note is denominated in euros. The U.S. dollar equivalent of the note principal is as follows: LO 9-2 LO 9-2 LO 9-2 LO 9-2, 9-3 Problems 1. Which of the following combinations correctly describes the relationship between foreign currency transactions, exchange rate changes, and foreign exchange gains and losses? LO 9-1 Type of Transaction Foreign Currency Foreign Exchange Gain or Loss a. Export sale Appreciates Loss b. Import purchase Appreciates Gain c. Import purchase Depreciates Gain d. Export sale Depreciates Gain Date Amount July 1, 2020 (date borrowed). . . . . . . . . . . . . . . . . . . . . . . . . $225,000 December 31, 2020 (Mifflin’s year-end). . . . . . . . . . . . . . . . 220,000 July 1, 2021 (date repaid). . . . . . . . . . . . . . . . . . . . . . . . . . . . 210,000 In its 2021 income statement, what amount should Mifflin include as a…
Today, each US Dollar can be exchanged for LLL 2.84 in LaLaLand. There is a general belief that three years from now the exchange rate will change to LLL 2.92. This information allows you to find the difference, each year, between the expected inflation rates between the USA and LaLaLand over the next three years. What is it? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Difference in annual inflation rates %
A currency swap has a remaining life of 12 months. It involves exchanging interest at 11% on £25 million for interest at 7% on $40 million once a year. The term structure of interest rates in both the United Kingdom and the United States is currently flat, and if the swap terms were negotiated today the interest rates exchanged would be 5.5% in dollars and 7.5% in sterling. All interest rates are quoted with annual compounding. The current exchange rate (dollars per pound sterling) is 1.7600. Calculate the current value of the swap to the party paying sterling using the bond valuation approach. What is the value of the swap to the party paying dollars? Calculate the current value of the swap to the party paying sterling by viewing the swap as a portfolio of forward contracts.
On April 1, 2017, Mendoza Company borrowed 500,000 euros for one year at an interest rate of 5 percent per annum. Mendoza must make its first interest payment on the loan on October 1, 2017, and will make a second interest payment on March 31, 2018, when the loan is repaid. Mendoza prepares U.S.-dollar financial statements and has a December 31 year-end. Prepare all journal entries related to this foreign currency borrowing assuming the following exchange rates for 1 euro:
Suppose that the current spot exchange rate is €0.830/S and the three-month forward exchange rate is €o.815/S. The three-month interest rate is 6.00 percent per annum in the United States and 5.40 percent per annum in France. Assume that you can borrow up to $1,000,000 or €830,000. Show how to realize a certain profit via covered interest arbitrage, assuming that you want to realize profit in terms of U.S. dollars. Also determine the size of your arbitrage profit.
In a fixed-for-fixed currency swap, 1.1% on a US dollar principal of $127 million is received and 1.7% on a British pound principal of 156 million pounds is paid. The current exchange rate is 1.7 dollar per pound. Interest rates in both countries for all maturities arecurrently 5.9% (continuously compounded. Payments are exchanged every year. The swap has 2.5 years left in its life. What is the value of the swap to the US dollar receiver, in millions of dollars?
Currently, the spot exchange rate is $1.67 per £ and the three-month forward exchange rate is $1.69 per £. The three-month interest rate is 8.0% per annum in the U.S. and 5.8% per annum in the U.K. Assume that you can borrow as much as $1,670,000 or £1,000,000. Required: a. Determine whether the interest rate parity is currently holding. b. If the IRP is not holding, how would you carry out covered interest arbitrage? What will be your arbitrage profit? c. Explain how the IRP will be restored as a result of covered arbitrage activities. Complete this question by entering your answers in the tabs below. Required A Required B Required C Determine whether the interest rate parity is currently holding. Determine whether the interest rate parity is currently holding.
The current USD/GBP exchange rate is 1.8 dollars per pound. The six-month forward exchange rate is 1.82. The six-month GBP interest rate is 3% p.a. quarterly compounded. Estimate the six-month USD interest rate (p.a. quarterly compounded, stated in percent).

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