The following market data relate to USD and Yen rates: Spot USD/YEN 116.00 3 months dollar deposit rate 4.5% 6 months dollar deposit rate 5% 3 months yen deposit rate 0.25% 6 months yen deposit rate 0.25% FRA rate for yen is nil a.What is a forward rate agreement? B .What would be the 6 month USD/Yen forward rate? C .What should be the 3 month USD FRA rate 3 months forward? D .The 6 and 12 month USD libors are 5% and 6.5% respectively. What should your bank do if another bank is quoting 6/12 USD FRA at 6.5 -6.75%?

The following market data relate to USD and Yen rates: Spot USD/YEN 116.00 3 months dollar deposit rate 4.5% 6 months dollar deposit rate 5% 3 months yen deposit rate 0.25% 6 months yen deposit rate 0.25% FRA rate for yen is nil a.What is a forward rate agreement? B .What would be the 6 month USD/Yen forward rate? C .What should be the 3 month USD FRA rate 3 months forward? D .The 6 and 12 month USD libors are 5% and 6.5% respectively. What should your bank do if another bank is quoting 6/12 USD FRA at 6.5 -6.75%?

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter7: International Arbitrage And Interest Rate Parity

Section: Chapter Questions

Problem 40QA

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Concept explainers

Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in the near past and is expected to be more affluent in the future. The use of exchange-traded derivative financial instruments has been multi-folded to provide for the requirements of various MNCs and offshore potential investors. Most banks and financial institutions have helped integrate the global economies. Our Government has introduced some bold and extreme measures to fulfil the purpose behind the fiscal, industrial, and monetary policies. The enactment of GST is a huge step towards streamlining the taxation system of the country. Owing to Covid-19, this aspect of corporate risk management has become critical.

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a.What is a forward rate agreement?
B .What would be the 6 month USD/Yen forward rate?
C .What should be the 3 month USD FRA rate 3 months forward?
D .The 6 and 12 month USD libors are 5% and 6.5% respectively. What should your bank do if another bank is quoting 6/12 USD FRA at 6.5 -6.75%?

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