Problem 7.4 Kapinsky Capital (A) Christoph Hoffeman trades currency for Kapinsky Capital of Geneva. Christoph has $10 million to begin with, and he must state all profits at the end of any speculation in U.S. dollars. The spot rate on the euro is $1.3358/€, while the 30-day forward rate is $1.3350/€. a. If Christoph believes the euro will continue to rise in value against the U.S. dollar, so that he expects the spot rate to be $1.3600/€ at the end of 30 days, what should he do? b. If Christoph believes the euro will depreciate in value against the U.S. dollar, so that he expects the spot rate to be $1.2800/€ at the end of 30 days, what should he do?

Problem 7.4 Kapinsky Capital (A) Christoph Hoffeman trades currency for Kapinsky Capital of Geneva. Christoph has $10 million to begin with, and he must state all profits at the end of any speculation in U.S. dollars. The spot rate on the euro is $1.3358/€, while the 30-day forward rate is $1.3350/€. a. If Christoph believes the euro will continue to rise in value against the U.S. dollar, so that he expects the spot rate to be $1.3600/€ at the end of 30 days, what should he do? b. If Christoph believes the euro will depreciate in value against the U.S. dollar, so that he expects the spot rate to be $1.2800/€ at the end of 30 days, what should he do?

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 the spot rate of the yen today is $0.0100 while the three-month forward rate is $0.0096. How can a U.S. exporter who is to receive 350,000 yen in three month hedge its foreign exchange risk? What happens if the exporter does not hedge and the spot rate of the yen in three months is $0.0098?
Question 2 Suppose that you are working for ANZ Bank as a foreign exchange trader and are currently exploring the opportunity of engaging a cover interest arbitrage possibility. You can invest New Zealand Dollar (NZD) 10,000 or British pound (GBP) 10,000. You faced the following exchange rate and interest rate quotes. Sport rate (NZD/GBP) One-year forward rate (NZD/GBP) One-year New Zealand 2.7450-2.7550 2.6450-2.6550 Interest rate 7.75%-8.25% One-year British interest Rate 3.75%-4.25% a) Show how to realize Covered interest arbitrage (CIA), assuming you want to realize in term of NZD and determine the arbitrage profit/losses. b) the arbitrage profit/losses. Assume that you want to realize in term of GBP. Show the CIA process and determine
Exercise 2.12. At the close of business on 20 November 2020, the exchange rate for Australian dollars against the British pound is 1.7148 (GBP is the domestic currency). This means that you get A$1.7148 for £1. The Bank of England rate is 0.5% and the Reserve Bank of Australia rate is 2.5%. Find the 3-months forward price of a Australian dollar (in GBP).
You Answered Today you observe the folowing quotes: Spot EURUSD $1.37 60 Day Forward EURUSD = $1.15 In 60 day you expec to receive 281,718 Euros. In 60 days you expect the EURUSD exchange rate to be $1.17. In 60 days the EURUSD actually is $1.21. You decided to hedge your receivables with a forward. How many USD will you receive? 232,824.79
Question 5 Yankee Company Ltd. is a U.S. based company that has plans to borrow EUR 10 million to fund increased working capital to boost sales of its product in Europe. The company expects Euro interest rates to rise so it enters into a 3X9 Forward Rate Agreement (FRA) to lock in the interest rate it will pay on its Euro borrowing. The current borrowing rate on the contract date is 3.5%. The borrowing rate on the rc. settlement date rises to 3.8%. rs Required: a) Calculate the amount that Yankee Co. needs to pay to settle the FRA on the settlement date b) Yankee Co. management subsequently decides to extend its Euro borrowings for a year as its increased working capital in Europe has increased sales and profits. Yankee's main bank which funds its European operations offers it a one-year loan of Eur 10 million at a floating rate of interest of one-year Euro Interbank Offered Rate (Euribor) plus 3.5%. Yankee Co. prefers to pay a fixed rate of 3.25%. It enters into a swap agreement with…
Q 6. An Investor has €20000 and faces an interest of 5% in the Euro Zone or he could his Euro for pound sterling at the spot exchange rate and invest in UK market which gives interest of 15% The following are currency exchange rates £1.00=$1.50 and €1.00==$1.20 which makes the spot cross rate €1.25=£1.00 Find out a) the IRP forward rate of £ vs € and b) how much he will earn extra if invested in UK market?
QUESTION # 1North Bank has been borrowing in the U.S. markets and lending abroad, thus incurring foreign exchange risk. In a recent transaction, it issued a one-year $2 million CD at 6 percent and funded a loan in euros at 8 percent. The spot rate for the euro was €1.45/$ at the time of the transaction (US being the home country).Information received immediately after the transaction closing indicated that the euro will depreciate to €1.47/$ by year-end. If the information is correct, what will be the realized spread on the loan? What should have been the bank interest rate on the loan to maintain the 2 percent spread? Assume adjustments in principal value are included in the spread.The bank had an opportunity to sell one-year forward marks at €1.46. What would have been the spread on the loan if the bank had hedged forward its foreign exchange exposure?What is interest rate parity theory and calculate that at what forward exchange rate of dollars per euro, an investor in USA would…
Assume the following information: 90-day U.S. interest rate 90-day Malaysian interest rate 3% 5% 90-day forward rate of Malaysian ringgit Spot rate of Malaysian ringgit $0.394 $0.398 Assume that the Santa Barbara Co. in the United States will need 250,000 ringgit in 90 days. It wishes to hedge this payables position. Would it be better off using a forward hedge or a money market hedge? Substantiate your answer with estimated costs for each type of hedge. Do not round intermediate calculations. Round your answers to the nearest dollar. The firm will pay out $ in 90 days if it uses the forward hedge and $ if it uses the money market hedge. Thus, it should use the -Select- hedge.
Problem 19-4 (Algo) Required: Suppose a U.S. investor wishes to invest in a British firm currently selling for £33 per share. The investor has $66,000 to invest, and the current exchange rate is $2/£. Consider three possible prices per share at £31, £36, and £41 after 1 year. Also, consider three possible exchange rates at $1.60/£, $2/£, and $2.40/£ after 1 year. Calculate the standard deviation of both the pound- and dollar- denominated rates of return if each of the nine outcomes (three possible prices per share in pounds times three possible exchange rates) is equally likely. (Do not round intermediate calculations. Round your percentage answers to 2 decimal places.) X Answer is complete but not entirely correct. Standard deviation of pound-denominated return Standard deviation of dollar-denominated return 12.37 19.68 %
Question 2 You have the opportunity to store your hard-earned money in a French or a Japanese bank account. The Japanese bank account promises an interest rate of 2% a year. If you deposit 1000 Euro in the French bank account, interests will accrue so that you will have 1105 Euros in two years. Today's exchange rate is 1 Euro to 129.60 Yen. a) What should the 1-year forward exchange rate be for you to be indifferent between the two accounts? Make sure you explain what theories justify your calculations b) If the yearly inflation rate for France is 4%, what do you expect the Japanese inflation to be?
5. A U.S. firm expects a receivable (cash inflow) of €1,000,000 in six months. The current exchange rate is $1.125/€. Firm wants to sell euros in six months (to convert the inflow into dollars). Consider 3 possible spot prices in six months. 1. $1.195/€ 2. $1.100/€ 3. $1.025/€ What kind of option, put or call, is appropriate to hedge with? In each scenario, what is the total amount of the firm's NET receivable? NET receivable implies you should consider the receivable as well as the hedging costs of buying the option. (Assume an option exercise price of $1.130/€ and option premium of $.016/€) | 1. 2. 3.
Assume the following information regarding U.S. and European annualized interest rates: Currency U.S. Dollar ($) 4.5% Investment Rate Borrowing Rate 5.5% Euro (€) 5.1% 6.3% Golden R Inc. can borrow either $6 million or €5 million. The current spot rate of the euro is $1.02. Furthermore, Golden R Inc. expects the spot rate of the euro to be $1.35 in 60 days. What is Golden R. Inc.'s dollar profit from speculating if the spot rate of the euro is indeed $1.35 in 60 days? Your answer should be whole US dollars. No decimals.

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