Mr James Lucky, a British investor, is considering a five-year investment on zero-coupongovernment bonds. Currently, the annual yield to maturity of British, German and Chinesezero-coupon government bonds maturing in five years is 3%, 5% and 7%, respectively. Thespot exchange rate between the GBP and the Euro is £:€ = 1.18, while between the GBPand the CNY is £:CNY = 8.58. According to Mr Lucky's forecasting models, the spotexchange rates are expected to be £:€ = 1.37 and £:CNY = 8.25 in three years from today.%3DWhich of the three bonds would provide the highest cumulative return for Mr Lucky overthe next five years, if the exchange rate forecasts turn out to be correct? Provide allyour workings and full calculations, when answering this question.ii) What is the GBP to CNY rate (three-year) forecast that would make Mr Lucky indifferentbetween investing in either the British or the Chinese bond today? Provide all yourworkings and full calculations, when answering this question.

British Zero-Coupon Bond: This is a straightforward calculation since there's no currency exchange…

Mr James Lucky, a British investor, is considering a five-year investment on zero-coupon government bonds. Currently, the annual yield to maturity of British, German and Chinese zero-coupon government bonds maturing in five years is 3%, 5% and 7%, respectively. The spot exchange rate between the GBP and the Euro is £:€ = 1.18, while between the GBP and the CNY is £:CNY = 8.58. According to Mr Lucky's forecasting models, the spot exchange rates are expected to be £:€ = 1.37 and £:CNY = 8.25 in three years from today. Which of the three bonds would provide the highest cumulative return for Mr Lucky over the next five years, if the exchange rate forecasts turn out to be correct? Provide all your workings and full calculations, when answering this question. ii) What is the GBP to CNY rate (three-year) forecast that would make Mr Lucky indifferent between investing in either the British or the Chinese bond today? Provide all your workings and full calculations, when answering this question.

Mr James Lucky, a British investor, is considering a five-year investment on zero-coupon government bonds. Currently, the annual yield to maturity of British, German and Chinese zero-coupon government bonds maturing in five years is 3%, 5% and 7%, respectively. The spot exchange rate between the GBP and the Euro is £:€ = 1.18, while between the GBP and the CNY is £:CNY = 8.58. According to Mr Lucky's forecasting models, the spot exchange rates are expected to be £:€ = 1.37 and £:CNY = 8.25 in three years from today. Which of the three bonds would provide the highest cumulative return for Mr Lucky over the next five years, if the exchange rate forecasts turn out to be correct? Provide all your workings and full calculations, when answering this question. ii) What is the GBP to CNY rate (three-year) forecast that would make Mr Lucky indifferent between investing in either the British or the Chinese bond today? Provide all your workings and full calculations, when answering this question.

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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The two-month interest rates with continuous compounding in Australia and the United States are 4:2% and 3.5% per annum, respectively. The spot exchange rate is currentiy priced at USD 0.780 per AUD. Given the two-month forward contract on the Australian dollars in the market is curreritly priced at USD 0.782 per AUD, which transactions should an investor take today in order to take advantages of this arbitrage opportunity? Select one O a The forward is overpriced, the investor should sell the forward contract borrow USD and lend AUD Ob The forward is underpriced; the investor ishould buy the forward contract, borrow USD and lend AUD Oc The forward is underpriced; the investor should buy the forward contract, borrow AUD, and lend USD Od. The forward is overpriced; the investor should sell the forward contract, borrow AUD and lend USD
Manshukh
Suppose that the U.S. firm Halliburton buys construction equipment from the Japanese firm Komatsu at a price of ¥300 million. The equipment is to be delivered to the United States and paid for in one year. The current exchange rate is ¥100 = $1. The current interest rate on one-year U.S. Treasury bills is 6%, and on one-year Japanese government bonds the interest rate is 4%. a. If Halliburton exchanges dollars for yen today and invests the yen in Japan for one year, it will need $ to exchange today in order to have ¥300 million in one year. (Round your response to the nearest dollar)
Due to the integrated nature of their capital markets, investors in both the U.S. and Switzerland. require the same real interest rate, 2.7%, on their lending. There is a consensus in capital markets that the annual inflation rate is likely to be 2.3% in the U.S. and 3.1% in Switzerland for the next three years. The USD/CHF rate is currently 0.9582. What is your expected future spot for USD/CHF one year from now? (X.XXXX)
Your US-based firm is evaluating a project in France with cash flows in Euros. Which of the following rates should you use as a risk-free rate? US Treasury- 3 month 0.50% US Treasury- 10 year 2.90% US Treasury Inflation-Indexed- 10 year -0.12% France Government Debt- 10 year 1.37% Germany Government Debt- 10 year 0.85% AAA-rated Euro Area Central Government Bond- 10 year 0.92%
Suppose that the current EUR/GBP exchange rate is £0.86 per euro. The current 6-month interest rates are: GBP 4%, EUR 6%. There are three 6-month forward contracts available, with the following exchange rates: Contract A B C EUR/GBP 0.86 0.85 0.90 You expect to incur an expense of €50,000 in six months. Can you identify any relevant risk in terms of the EUR/GBP exchange rate? Would you use any of the available forward contracts to hedge against this risk? Explain and provide an example.
Suppose the U.S. yield curve is flat at 5% and the euro yield curve is flat at 3%. The current exchange rate is $1.25 per euro. What cash flows will be exchanged on a 4-year foreign exchange swap with notional principal of 260 million euros (or equivalently, at current exchange rates, $325 million)? Note: Do not round intermediate calculations. Enter your answer in dollars not millions rounded to the nearest dollar value. Swap rate ......... per year
Assume that Stevens Point Co. has net receivables of 100,000 Singapore dollars in 90 days. The spot rate of the S$ is $.50, and the Singapore interest rate is 2% over 90 days. Suggest how the U.S. firm could implement a money market hedge. Be precise.
Cray Research sold a supercomputer to the Max Planck Institute in Germany on credit and invoiced €11.00 million payable in six months. Currently, the six-month forward exchange rate is $1.15 per euro and the foreign exchange adviser for Cray Research predicts that the spot rate is likely to be $1.10 per euro in six months. Required: a. What is the expected gain/loss from a forward hedge? Note: A Negative value should be indicated with a minus sign. Do not round intermediate calculations. Round your final answer in whole dollars not in millions. b. If you were the financial manager of Cray Research, would you recommend hedging this euro receivable? c. Suppose the foreign exchange adviser predicts that the future spot rate will be the same as the forward exchange rate quoted today. Would you recommend hedging in this case? d. Suppose now that the future spot exchange rate is forecast to be $1.22 per euro. Would you recommend hedging? a. b. Would you recommend hedging this euro…
Nikul
(C) US Bank is considering investing in a three years' project in Europe country. The project would require an initial investment of $750,000 and it is expected to generate €80,000, €100,000 and €150,000 in year one until three, respectively. The business risk will be identical to the firm's existing line of business in the euro-zone, the required rate of return in the euro-zone is 18 percent. The exchange rate is $1.20/€ where the dollar also shows appreciating by one percent for every year. Determine the Net Present Value (NPV) in dollar currency for this project and justify.
ABC Company wants to possibly expand its plant in Europe. The current spot exchange rate is for Euro is €0.83. The initial investment is €2.1, with projected cash flows for three years at €950,000. The discount rate is 10%. The risk-free rate in the US is 5 percent and the risk-free rate in Europe is 7 percent. Calculate the NPV of the project into US Dollars, rounding to the nearest cent, format as "XXX,XXX.XX"

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