The two-month interest rates in Switzerland and the United States are 2% and 4% per annum with continuous compounding, respectively. The spot price of one Swiss franc is $0.8000. The forward price of a contract deliverable in two months is $0.8200. What transactions can USD-based arbitrageurs make to secure a sure gain in two months?

The two-month interest rates in Switzerland and the United States are 2% and 4% per annum with continuous compounding, respectively. The spot price of one Swiss franc is $0.8000. The forward price of a contract deliverable in two months is $0.8200. What transactions can USD-based arbitrageurs make to secure a sure gain in two months?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter22: International Financial Management

Section: Chapter Questions

Problem 2P

See similar textbooks

Similar questions

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
Suppose that you are the treasurer of IBM with an extra U.S. $1,000,000 to invest for six months. You are considering the purchase of U.S. T-bills that yield 1.810% (that’s a six month rate, not an annual rate by the way) and have a maturity of 26 weeks. The spot exchange rate is $1.00 = ¥100, and the six month forward rate is $1.00 = ¥110. The interest rate in Japan (on an investment of comparable risk) is 13 percent. What is your strategy?
XYZ Corporation, located in the United States, has an accounts payable obligation of ¥1500 million payable in six months to a bank in Tokyo. The current spot rate is ¥116/$1.00 and the six month forward rate is ¥109/$1.00. The annual interest rate is 3 percent in Japan and 6 percent in the United States. a) What is the future dollar cost of meeting this obligation using the money market hedge a. $92,307. b. $ 19582168.89 c. $13054779.26 d. $ 6589854.111
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?
Your firm has just issued five-year floating-rate notes denominated in U.S. dollars and indexed to six-month CME Term SOFR plus 0.70 percent. What is the amount of the first coupon payment your firm will pay per U.S. $1,000 of face value, if six-month CME Term SOFR is currently 8.8 percent? Note: Round your answer to 2 decimal places.
Suppose the nominal interest rate in the U.S. is 8% per year, the nominal interest rate in Brazil is 15% per year, and today’s spot rate is S ($/BRL) =0.49. Assuming that the International Fisher Effect holds, what is the expected spot rate S90 ($/BRL) in three months?
An investment manager based in Germany hedges a portfolio of UK gilts with a 3-month forward contract. The current spot rate is GBP0.833/EUR and the 90-day forward rate is GBP0.856/EUR. At the end of 3 months, the gilts have risen in value by -2.50% (in GBP terms), and the spot rate is now GBP0.82/EUR. What was the true cost of the forward contract? O a. 11.044% annualised. O b. 7.287 % annualised. OC 17.287% annualised. Od 14.787 % annualised.
An investment manager based in Germany hedges a portfolio of UK gilts with a 3-month forward contract. The current spot rate is GBP0.833/EUR and the 90-day forward rate is GBP0.856/EUR. At the end of 3 months, the gilts have risen in value by -2.50% (in GBP terms), and the spot rate is now GBP0.82/EUR. What was the true cost of the forward contract? a. 11.044% annualised. b. 17287% annualised. c. 7287% annualised. d. 14.787% annualised.
Space-X Corporation, located in the United States, has an accounts payable obligation of $750 million payable in one year to Mitsubishi Electric of Japan. The current spot rate is ¥116/$ and the one year forward rate currently is ¥115/S. However, it is expected that the actual spot rate one year from now could be ¥118/S. The annual interest rate is 3 percent in Japan and 6 percent in the United States. One-year Call Options on ¥ (one Option round-lot ¥1,000,000) with a Strike/Exercise Price of $0.0086 are currently trading at the Philadelphia Stock Exchange (PHLX) for a premium of 0.012 cents How many Option round-lots are required for a perfect hedge? OA 1400 OB. 1500 OC. 903.50 OD.910
Vijay
An investment manager based in Germany hedges a portfolio of UK gilts with a 3-month forward contract. The current spot rate is GBPO.833/EUR and the 90-day forward rate is GBPO.856/EUR. At the end of 3 months, the gilts have risen in value by -2.50% (in GBP terms), and the spot rate is now GBPO.82/EUR. What was the true cost of the forward contract? O a. 11.044% annualised. O b. 17.287% annualised. О с. 7.287% annualised. O d. 14.787% annualised.
Current USD Interest rates are 7% per annum and AUD rates are 9% per annum, flat for all terms. Current value of AUD is 0.62 USD. Under a FX swap agreement, a financial institution pays 8% per annum in AUD and receives 4% per annum in USD. Notional principals are 12 Million USD and 20 Million AUD. Payments are exchanged every year, with one exchange having just taken place. The swap will last 5 more years. What is the value of the swap to the financial institution?