Essentials of Investments (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
10th Edition
ISBN: 9780077835422
Author: Zvi Bodie Professor, Alex Kane, Alan J. Marcus Professor
Publisher: McGraw-Hill Education
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Chapter 19, Problem 1CP
Renee Michaels. CFA. plans to invest $1 million in U.S. government cash equivalents for the next 90 days. Michaels’s client has authorized her to use non-U.S. government cash equivalents, but only if the currency risk is hedged to U.S. dollars by using forward currency contracts. (LO 19-2)
- Calculate the U.S.-dollar value of the hedged investment at the end of 90 days for each of the two cash equivalents in the table below. Show all calculations.
- Briefly explain the theory that best accounts for your results.
- Based upon this theory, estimate the implied interest rate for a 90-day U.S. government cash equivalent.
| Interest Rates 90-Day Cash Equivalents |
|
| Japanese government |
7.6% |
| Swiss government |
86 |
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Heidi Høi Jensen, a foreign exchange trader at J.P. Morgan Chase, can invest $15
million, or the foreign currency equivalent of the bank's short term funds, in a
covered interest arbitrage with Denmark. Heidi plans to use the following quotes to
make a covered interest arbitrage (CIA).
Assumptions
Arbitrage funds available
Spot exchange raté (kr/S)
3-month forward rate (kr/S)
US dollar 3-month interest rate
Danish kroner 3-month interest rate
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$15,000,000
5.1197
5.1611
4.4679%
8.0239%
Because for this level of analysis/problems, small differences in % lead to arbitrage
profit/losses, please always use 4 digits in your calculations
For your answer (since this is a dollars answer), round your answer to the nearest
$0.01 (use 2 decimals). DO NOT USE commas to separate thousands. For negative
results, enter the minus (-) symbol in front of the first digit/#. For example, if your
answer is $4,000,287.329; then enter 4000287.33; if your answer is $400 then
enter 400.00
If Heidi makes…
Heidi Høi Jensen, a foreign exchange trader at J.P. Morgan Chase, can invest $5 million, or the foreign currency
equivalent of the bank's short term funds, in a covered interest arbitrage with Denmark.
Assumptions
Arbitrage funds available
Spot exchange rate (kr/$)
3-month forward rate (kr/S)
US dollar 3-month interest rate
Danish kroner 3-month interest rate
Value
$5,000,000
6.1720
6.1980
4.000%
a)
5.000% a)
kr Equivalent
kr 30,860,000
Heidi Høi Jensen generates a covered interest arbitrage profit because, although U.S. dollar interest rates are lower,
the U.S. dollar is selling forward at a premium against the Danish krone. What is the amount of that profit?
kr21,102
kr34,750
kr24,250
kr54,150
The treasurer of a major U.S. firm has $31 million to invest for three months. The interest
rate in the United States is 30 percent per month. The interest rate in Great Britain is.34
percent per month. The spot exchange rate is £.630, and the three-month forward rate is
£.632. What would be the value of the investment if the money is invested in the US and
Great Britain? (Do not round intermediate calculations and enter your answers in
dollars, not in millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)
U.S.
Great Britain
Chapter 19 Solutions
Essentials of Investments (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 19 - Prob. 1PSCh. 19 - Prob. 2PSCh. 19 - Prob. 3PSCh. 19 - Prob. 4PSCh. 19 - Prob. 5PSCh. 19 - Prob. 6PSCh. 19 - Now suppose the investor in Problem 3 also sells...Ch. 19 - Prob. 8PSCh. 19 - If the current exchange rate is 1.35/ , the...Ch. 19 - If you were to invest 10,000 in the British bills...
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