Suppose that California Co., a U.S. based MNC, seeks to capitalize a difference in interest rates between euros and British pounds via the use of acarry trade. In particular, after 1 month, funds invested in euros will yield a 0.50% percent return, while funds invested in pounds will yield a return of2.00% percent.Currently the spot rate of the British pound is $1.00 while the spot rate of the euro is $0.80. In other words, the pound is worth 1.25 euros. CaliforniaCo. expects these spot rates to remain constant over the next month.After 1 month, California Co. now has 693,600 pounds after investing their converted pounds. However, it is now time for California Co. to repay the600,000 euro loan.If California Co. borrowed these euros at the prevailing rate of 0.50% percent, they must repay a total ofrate of 1.25, this repayment is equivalent topounds.euros. At the crosspounds. Thus, after repaying the loan, California Co. will have

Final Answer: If California Co. borrowed these euros at the prevailing rate of 0.50% percent, they…

Answered: Suppose that California Co., a U.S.…

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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Use the information below to calculate the expected gain or loss on the carry trade strategy for an initial borrowed amount of 1,000,000 (you will have to determine the currency of borrowing). Keep at least two decimals in your calculations but round up or down at the end (enter the final answer without decimals). Current spot rate of Polish zloty (PLN/EUR) Expected future spot rate of of zloty (PLN/EUR) in three months Annualized three-month interest rate on Polish zloty (%) Annualized three-month interest rate on euros (%) 3,119,971 135,769 margin of error +/- 10 4.64 4.11 3.77 1.53
The treasurer of a major U.S. firm has $31276878 to invest for three months. The annual interest rate in the United States is 0.35% per month. The interest rate in Great Britain is 0.59% per month. The spot exchange rate is £0.72, and the three-month forward rate is £0.74. Ignoring transaction costs, what would be the NPV of investing in Great Britain as opposed to invest in the U.S.? NOTE: Enter the number rounding to four decimal places
I would appreciate it if this was done in excel please A US bank converts $ 1 million to SF to make an SF loan to a valued customer when the exchange rate was 1.53 SF per USD. The borrower agrees to repay the principal plus 6.25% interest in one year. The borrower repaid SF at loan maturity and when the loan was repaid the exchange rate was 1.63 SF per USD. What was the bank's dollar rate of return?
American Pharoah management is planning to make a $ 2.0 million loan to a French firm. Currently, LIBOR is at 1.5 percent. American management considers a default risk premium of 1.30 percent, a foreign exchange rate risk premium of 0.20 percent, and a country risk premium of 0.13 percent to be appropriate for this loan.What is the loan rate charged by American Pharoah?
Suppose that the U.S. interest rate on one year Treasury notes was 4.5%. We will use this as the annual interest rate in the U.S. And suppose that the interest rate on the one-year German Treasury note was 4.1%. The spot rate is 1.0162 EUR/USD.. And the 3-month forward rate is 1.0188 Eur/USD. Is there an opportunity for covered interest arbitrage? If so, what would be the total profit if we borrowed $20 million for 3 months? A. YES- $27,395.21 would be the profit B. YES- $29,385.41 would be the profit C. YES- $31,695.53 would be the profit D. YES- $33,875.42 would be the profit E. NO- there is no opportunity for a profit
The 6-month interest rate in the US is 12.25% p.a. The 6-month interest rate in Canada is 15.25% p.a. The spot rate is US$0.8203/Canadian$ and the 6-month forward rate is US$0.8113/Canadian$. For a transaction size of US$700,000, how can an investor take advantage of the situation without taking undue risks? Ignore transaction costs and income taxes
A European firm borrows MXN from a Mexico bank at a 7% interest rate. Over that same time, the Euro appreciates 2.70% against the MXN. What is the European firm's €-denominated equivalent cost of borrowing?
Newstar Co. expects to pay 500,000 euro in one year. Assume the annual interest rate of borrowing or lending euro is 1% and the annual interest rate of borrowing or lending U.S. dollar is 2%. The spot rate of euro is $1.12 per euro. How much guaranteed amount of U.S. dollar does the company expect to pay after hedging the euro payable transaction in the international money market? (pick the closest answer) A. 565,545 USD. B. 554,510 USD. C. 562,786 USD. D. 576,912 USD.
If the current exchange rate is $1.90/£, the one-year forward exchange rate is $2.06/£, and the interest rate on British government bills is 5% per year, what risk-free dollar-denominated return can be locked in by investing in the British bills? (Do not round intermediate calculations. Round your percentage answer to 2 decimal places.)
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
A U.S. firm, sells merchandise today to a British company for £100,000. The current exchange rate is $1.38/£, the account is payable in three months, and the firm chooses to hedge by borrowing £98,765.43 today and exchanging the proceeds today for dollars; the loan will be paid back with the £100,000 accounts receivable (money market hedge). If Husky converted the borrowed pounds into dollars today and invested that amount at its WACC of 6% (1.5% for 90 days), how much much money in U.S. dollars will Husky Sporting Goods Company have in 90 days?
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.

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