James Clark is a currency trader with Wachovia. He notices the following quotes:Spot exchange rate SFr1.2056 per $Six-month forward exchange rate SFr1.1927 per $Six-month Dollar interest rate 2.5% per yearSix-month Swiss franc interest rate 2.0% per yearRequired:Is the interest rate parity holding? You may ignore transaction costs.What steps should be taken to make arbitrage profit? Assuming that James Clark is authorizedto work with $1,000,000. Compute the arbitrage profit.

In summary:The interest rate parity does not hold.The steps for arbitrage involve borrowing USD,…

Answered: James Clark is a currency trader with…

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 that Denver Financial Co. expects the exchange rate of the New Zealand dollar (NZ$) to depreciate from its current level of 0.5 to 0.45 in 30 days. Denver Financial seeks to capitalize on this potential opportunity. Suppose that Denver Financial begins by borrowing NZ$50,000,000 and converting it to U.S. dollars. The following table shows the short-term interest rates (annualized) in the interbank market. Currency U.S. Dollars New Zealand Dollars (NZ$) investment. Lending Rate Borrowing rate (Adjusted for 30-day period) (Adjusted for 30-day period) 6.72% 6.48% In the previous stages of this problem, you found that Denver Financial initially borrowed funds and must repay the equivalent of $22,630,500.00 after 30-days. However, using those funds, Denver Financial was able to secure $25,140,000.00 after 30-days (principal plus interest) due to their Thus, Denver's speculative profit is 7.20% 6.96% (U.S. dollars).
Suppose that the current spot exchange rate is €0.85 per $ and the three-month forward exchange rate is €0.8313 per $. The three- month interest rate is 5.60 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 €850,000. Required: a. How will you realize a certain profit via covered interest arbitrage, assuming that you want to realize profit in terms of U.S. dollars? What will be the size of your arbitrage profit? b. Assume that you want to realize profit in terms of euros. Show the covered arbitrage process and determine the arbitrage profit in euros. How will you realize a certain profit and size of your arbitrage profit? Complete this question by entering your answers in the tabs below. Required A Required B How will you realize a certain profit via covered interest arbitrage, assuming that you want to realize profit in terms of U.S. dollars? What will be the size of your arbitrage profit? Note: Do not round…
Suppose that your company will be receiving 30 million euros six months from now and the euro is currently selling for 1 euro per dollar. If you want to hedge the foreign exchange risk in this payment, what kind of forward contract would you want to enter into?
Which one of the following statements is correct about the exchange rates? A country with high inflation may see its currency to appreciate according to the asset market approach. Current interest rates are is=1% and iç-3.5% and they will stay constant for many years. We would expect the Euro to appreciate against dollar according to the uncovered interest rate parity. When the central bank of Australia raises interest rate to a level that is more than all traders expected, i.e. an unexpected rise in interest rate, the Australian dollar will depreciate. O The European Central Bank announces to increase interest rate by 0.1%. The market consensus was 0.2% increase before the announcement. Upon the news, we would see euro to appreciate. Price of currency futures(or forwards) will be slightly lower than the spot exchange rate at maturity.
Suppose that Cloudastries Bank is a U.S.-based financial intermediary that serves the foreign exchange market. Assume that this bank is willing to both purchase and sell currency for the same rate. In other words, assume there is no bid/ask spread. Suppose Cloudastries has made the following direct quotations: Currency Dollar Spot Rate $0.55 $1.65 Mexican Peso Euro Additionally, Cloudastries has quoted a cross exchange rate of 1 euro = 3.01 pesos. After exchanging euros for pesos, the last step in triangular arbitrage is to exchange those pesos for dollars. If you exchange your 36,484.84 for dollars from Cloudastries, you would receive This represents a profit of
Suppose the exchange rate between U.S. dollars and British Pounds is $1.00 = 1.56 Pounds and the exchange rate between the U.S. dollar and the Euro is $1.00 = 1.15 Euros. What is the direct quote cross rate of one Pound to the euro? (How many Euros will one Pound purchase?) Instruction: Type your answer in euros, and round to two decimal places
Suppose that the interest rate on a US dollar deposit is 3% and the interest rate on a Japanese yen deposit is 1%. Today’s exchange rate is $1/¥ and the expected rate one year in the future is $1.2/¥, so $100 today can be exchanges for ¥100. Which currency deposit yield a higher expected rate of return (which currency investors should be willing to hold)? Why?
Use the information below to answer the following questions. Currency per U.S. $ 1.2380 1.2353 Australia dollar 6-months forward Japan Yen 6-months forward U.K. Pound 6-months forward 100.3600 100.0200 .6789 .6784 Suppose interest rate parity holds, and the current six month risk-free rate in the United States is 5 percent. Use the approximate interest rate parity equation to answer the following questions. a. What must the six-month risk-free rate be in Australia? (Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What must the six-month risk-free rate be in Japan? (Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Australian risk-free rate b. Japanese risk-free rate c. Great Britain risk-free rate c. What must the six-month risk-free rate be in Great Britain? (Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) % % %
please help me figure out step by step how to ca;culate and find the answer
Doug Bernard specializes in cross-rate arbitrage. He notices the following quotes: Swiss franc/U.S. dollar = 1.5971 CHF/USD Australian dollar/U.S. dollar = 1.8215 AUD/USD Australian dollar/Swiss franc = 1.1300 AUD/CHF Does Doug Bernard have an arbitrage opportunity based on these quotes? If there is an arbitrage opportunity, how much would he profit if he has $1,000,000 USD? A. No, there is no profitable arbitrage opportunity. B. Yes, he can make $9,296 USD profit. C. None is correct. D. Yes, he can make $8,573 USD profit.
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
Suppose a U.S. investor wishes to invest in a British firm currently selling for £64 per share. The investor has $12,800 to invest, and the current exchange rate is $2/£.Suppose now the investor also sells forward £6,400 at a forward exchange rate of $1.90/£. Required:a. Calculate the dollar-denominated returns for each scenario. (Round your percentage answers to 2 decimal places. Negative amounts should be indicated by a minus sign.)

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