Suppose a U.S. investor wishes to invest in a British firm currently selling for £30 per share. The investor has $6,000 to invest, and the current exchange rate is $2 per £. Consider three possible prices per share at £26, £31, and £36 after 1 year. Also, consider three possible exchange rates at $1.60 per £, $2 per £, and $2.40 per £ 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. Note: Do not round intermediate calculations. Round your answers to 2 decimal places. Standard deviation of pound-denominated return Standard deviation of dollar-denominated return 10.22 % 13.33 %

Suppose a U.S. investor wishes to invest in a British firm currently selling for £30 per share. The investor has $6,000 to invest, and the current exchange rate is $2 per £. Consider three possible prices per share at £26, £31, and £36 after 1 year. Also, consider three possible exchange rates at $1.60 per £, $2 per £, and $2.40 per £ 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. Note: Do not round intermediate calculations. Round your answers to 2 decimal places. Standard deviation of pound-denominated return Standard deviation of dollar-denominated return 10.22 % 13.33 %

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 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
You are an American investor who can borrow $1,000,000 or the equivalent amount in euros today. Suppose the spot rate is $1.18/€, and the one-year forward rate is $1.15/€. The annual interest rate is 4 percent in the U.S. and 2 percent in Germany. Check if IRP holds. If it does not hold, set up a covered interest arbitrage. What will be your profit from this arbitrage opportunity in dollars?
Suppose that the invester of GMO has an extra cash reserveof $700,000 to invest. The interest rate is 1.49% per year in the United States and 6.47% per year in Mexico. Currently, the spotexchange rate is 19.780 Pesos per dollar and the one-year forwardrate is €19.790 per dollar. The investor does not wishto bear any exchange risk. Assess how he can construct an arbitrage portfolio based on your calculation.
The one-year interest rate in Australia is given as 0.5% and the one year interest rate in New Zealand is given as 1%. The spot rate of the New Zealand dollar is A$0.95. You will receive 10,000 New Zealand dollars in one year.(a) Using the international Fisher effect, calculate the expected change in the exchange rate for the New Zealand dollar.(b) Using your answer to (a), calculate the amount of Australian dollars you will receive when converting the New Zealand dollars to Australian dollars in one year at the spot rate at that time.
Suppose a U.S. investor wishes to invest in a British firm currently selling for £40 per share. The investor has $10,000 to invest, and the current exchange rate is $2/£. a. How many shares can the investor purchase? Number of shares = b. Fill in the table below for rates of return after one year in each of the nine scenarios (three possible prices per share in pounds times three possible exchange rates). (Leave no cells blank - be certain to enter "0" wherever required. Negative values should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.) Price per Share (£) Pound-Denominated Return (%) Dollar-Denominated Return (%)for Year-End Exchange Rate $1.80/£ $2/£ $2.20/£ £35 % % % % % % £40 % % % % % % £45 % % % % % %
The US 1 year spot rate is 3.61% and the Mexican 1 year spot rate is 7.44%. A US investor purchases a Mexican corporate bond with an expected 1 year return of 9.76%, as measured in Mexican peso. The current USD/MXP exchange rate is 0.18. If the investor decides to hedge the currency risk exposure in the forward market, what would be the expected return on this portfolio, if interest rate parity holds?
Data from The Economist BigMac index from January 2022 shows that the localprice of a Big Mac in Argentina is 450 Argentine pesos (ARS) and the price of a BigMac in Britain is 3.59 pounds sterling (GBP). The exchange rate XARS/GBP = 140.895.Assume there is no bid-ask spread. In Big Mac terms, the Argentine peso is undervalued relative to the poundsterling. Describe how undervaluation is measured. By how much is theArgentine peso undervalued relative to the pound sterling?
4. An American put option to sell a British pound for dollars has a strike price of $1.5 and a time to maturity of 1 year. The volatility of the pound/dollor exchange rate is 15% per annum, the dollar interest rate is 6%, the British pound interest rate is 7%, per annum, and the current exchange rate is 1.52. Use a three-step binomial tree to value the option.
You have $ 10 million to invest. If you invest the money in the US for six months, you can earn 2%/year. Alternatively, you can invest in Switzerland and earn 4%/year. The spot exchange rate is CHF 0.9188/$. The forward exchange rate for delivery six months hence is CHF 0.9188/$. Which method of investing do you prefer and what will be the value of your investment at maturity? Assume no transaction cost. O Invest in the US; $10,373,610 Invest in Switzerland; $10,202,013 O None of these O Invest in Switzerland; CHF 10,373,610 O Invest in the US; $10,100,502
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.
An American firm wants to borrow 100 million USD for 1 year to fund a capital investment project. The firm can borrow the money from a U.S. bank at an interest rate of 6%. Alternatively, the firm could borrow British pounds at a rate of 3% a year. At the end of the year, the firm would pay back the loan and interest. The initial exchange rate is 1 GBP = 2 USD. If at the end of the year the exchange rate changes from 1 GBP = 2 USD to 1 GBP = 3 USD, what was the actual cost of borrowing (effective interest rate) if the American firm chose to obtain the loan in British pounds?
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