years: in the first year, 1.5 million and in the second year One million. In addition the followingSuppose an Ethiopian metal manufacturing firm is thinking of investment for making metals inUSA. It is estimated that the initial project cost will be 2.5 million in USA Dollar. It is alsoestimated that the project will generate the following free cash flows in US $ for the next twoProblem 3rates are estimated:Spot exchange rate, 1 US $ = 22 BirrOne year forward rate, 1 US $= 24 BirrTwo year forward rate, 1 US $ = 21 BirrCost of capital is 10 percent.Should it be accepted or rejected? Why? (Show it mathematically using Net Present Valuemethod)

Initial investment =2.5 million 1Us=22 1 year cash flow =1.5 million 1 Us=24 2 year cash flow…

Spot exchange rate, 1 US $= 22 Birr One year forward rate, 1 US $ = 24 Birr Two year forward rate, 1 US $= 21 Birr Cost of capital is 10 percent. Should it be accepted or rejected? Why? (Show it mathematically using Net Prese method)

Spot exchange rate, 1 US $= 22 Birr One year forward rate, 1 US $ = 24 Birr Two year forward rate, 1 US $= 21 Birr Cost of capital is 10 percent. Should it be accepted or rejected? Why? (Show it mathematically using Net Prese method)

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 current spot exchange rate is $1.85/£ and the three-month forward rate is $1.80/£. Based on your analysis of the exchange rate, you are pretty confident that the spot exchange rate will be $1.82/£ in three months, assume that you would like to buy or sell £1,000,000. a) what actions do you need to take to use these rates to earn a profit? what is the expected dollar profit from speculation? b) What would be your speculative profit in dollar terms if the spot exchange rate actually turns out to be $1.76/£
Suppose that the current EUR/GBP rate is 0.6668 and the one-year forward exchange rate is 0.6742. The one-year interest rate is 1.8% in euros and 3.6% in pounds. You can borrow at most €1,000,000 or the equivalent pound amount. Suppose you are a pound-based investor. Determine the profit/loss (in GBP, no cents) if you borrow locally and invest in Euros.
a) A stock sells for $125. A call option on the stock has an exercise price of $110 and expires in 3 months. If the interest rate is 0.15 and the standard deviation of the stock's return is 0.30. What would be the price of a put option on the same stock with an exercise price of $140 and the same time (3 months) until expiration? Show all workings. (See Appendix for the Cumulative Normal Distribution Table)
Suppose you have the following spot exchange rates: USD/AUD 0.5300 AUD/EUR 1.6428 USD/EUR 0.8782 a) Calculate the US dollar profit (per 1 USD), if any, on a three-point arbitrage. b) Calculate AUD profit (per 1 AUD), if any, on a three-point arbitrage. c) How can you explain the answers in (1) and (2)?
A. Suppose the dollar interest rate and the euro interest rate are the same and equal 2 percent per year. Suppose the expected future $/€ exchange rate is $1.20 per 1 €. Suppose now Euro interest rate decreases to 1 percent per year. Determine how the new equilibrium $/€ exchange rate will change if the US interest rate remains constant. B. Indicate how the change in the Euro interest rate will affect the equilibrium $/€ exchange rate and the expected return on euro assets. Explain the changes on the graph.
Suppose that the one-year interest rate is 5.0 percent in the United States and 3.5 percent in Germany, and that the spot exchange rate is $1.12/€ and the one-year forward exchange rate, is $1.16/€. Assume that al of these rates will be used and a speculator can borrow $1,000,000 or €1,000,000. This is an example whether Uncovered Interest Arbitrage is possible O This is an example of whether Purchasing Power Parity holds This is an example whether fisher effect holds O None of the above This is an example whether Covered Interest Arbitrage is possible
Suppose there are no transaction costs. If the one year forward rate of the euro is an accurate estimate of the spot rate one year from now, then the actual cost of hedging payable will be: A. positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount. B. positive. C. negative. D. zero.
Country Currency Lodging Food Miscellaneous Exchange rate Total € (₁₂₁) € Germany: Euros USD EUR 658.27 718.44 195.00 761.42 831.02 225.56 1818.00 1.1567 USD/EUR INR India: Rupees USD 25,234.90 16,107.38 5,330.00 413.10 ¥ 263.68 ¥ 87.25 ¥ 764.03 0.01637 USD/INR China: Yuan USD CNY 4,983.89 2,507.29 1,730.00 749.08 376.85 260.02 1385.94 0.1503 USD/CNY
Assume a risk-free asset in the U.S. is currently yielding 2.7 percent while a Canadian risk-free asset is yielding 2.8 percent and the current spot rate is Can$1.2849 = $1. What is the approximate 6-month forward rate if interest rate parity holds? Can$1.2855 Can$1.2838 Can$1.2843 Can$1.2862 Can$1.2836
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 $1,000,000 or €830,000. Show how to realize a certain profit via covered interest arbitrage, assuming that you want to realize profit in terms of U.S. dollars. Also determine the size of your arbitrage profit.
Use the information below to answer the following question. So($/€) F360 ($/€) Exchange Rate $ 1.45 € 1.00 = $ 1.48 = € 1.00 Interest Rate APR is i€ 4% 3% If you borrowed $1,000,000 for one year, how much money would you owe at maturity? Short Answer Toolbar navigation BIUS $1,524,400 A RN KE
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.

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