2. Suppose that the term structure of interest rates is flat in the United States andAustralia. The USD interest rate is 7% per annum and the AUD rate is 9% perannum. The current value of the AUD is 0.62 USD. Under the terms of a swapagreement, a financial institution pays 8% per annum in AUD and receives 4% perannum in USD. The principals in the two currencies are $12 million and 20million AUD. Payments are exchanges every year, with one exchange having justtaken place. The swap will last two more years. What is the value of the swap tothe financial institution? Assume all interest rate are continuously compounded.

To calculate the value of the swap to the financial institution, we need to compute the present…

Answered: 2. Suppose that the term structure of…

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 that the term structure of risk-free interest rates is flat in the United States and Australia. The USD interest rate is 5.9% per annum and the AUD rate is 5.7% per annum. The current value of the AUD is 0.57 USD. Under the terms of a swap agreement, a financial institution pays 2.0% per annum in AUD and receives 5.0% per annum in USD. The principals in the two currencies are $12 million USD and 20 million AUD. Payments are exchanged every year, with one exchange having just taken place. The swap will last two more years. What is the USD value of the swap to the financial institution? Assume all interest rates are continuously compounded. Enter your answer rounded to the nearest integer,
Assume the spot rate between the uk and the US is .€ .6789= $1 while the one year Foward rate is €.6782=$1. The risk free rate in the UK is 3.1 percent. The risk free rate in the U.S is 2.9 percent. How much profit can you earn for the year on a loan of $1,500 by utilizing covered interest abitrage?
Suppose that the term structure of risk-free interest rates is flat in the United States and Australia. The USD interest rate is 7% per annum and the AUD rate is 9% per annum. The current value of the AUD is 0.62 USD. Under the terms of a swap agreement, a financial institution pays 8% per annum in AUD and receives 4% per annum in USD. The principals in the two currencies are $12 million USD and 20 million AUD. Payments are exchanged every year, with one exchange having just taken place. The swap will last two more years. What is the value of the swap to the financial institution? Assume all interest rates are continuously compounded.
Suppose that the U.S. interest rate on one year Treasury notes was 4.7%. 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 4.2%. 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 $25 million? OA YES-$27,395.21 would be the profit OB. YES-$33,385.41 would be the profit OC. YES-$37,342.89 would be the profit OD. NO- there is no opportunity for a profit
If the foreign interest rate is 4%, the risk premium on domestic assets, ρ, is 18%, and the expected rate of depreciation of the domestic currency against the foreign currency is 3%, what is the domestic interest rate in percentage terms, given covered interest parity holds? [All variables have a 1-year time frame.]
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- $33,875.42 would be the profit E. NO- there is no opportunity for a profit
Suppose that the annual interest rates on 6-months borrowing in Romania and the United States are 12.7 % and 0.8 %, respectively. The current spot rate RON/US$ is 4.00 and 6-months forward rate RON/US$ is 4.21. Does interest rate parity hold? Would it be as a result of covered or uncovered interest arbitrage, why? Determine arbitrage potential in b) using spot rate after six months of RON/US $= 4.25 rather than 6-months forward rate.
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
Required:a. Calculate the dollar proceeds from the FI’s loan portfolio at the end of the year, the return on the FI’s loan portfolio, and the net return for the FI if the pound spot foreign exchange rate falls to $1.20/£1 and the lira spot foreign exchange rate falls to $0.156/TL1 over the year.b. Calculate the dollar proceeds from the FI’s loan portfolio at the end of the year, the return on the FI’s loan portfolio, and the net return for the FI if the pound spot foreign exchange rate rises to $1.40/£1 and the lira spot foreign exchange rate rises to $0.17/TL1 over the year.c. Suppose that the FI funds the $250 million U.S. loans with $250 million one-year U.S. CD at a rate of 4 percent; funds $150 equivalent British loans with $150 million equivalent one-year pound CDs at a rate of 5 percent; funds $100 million equivalent Turkish loans with $100 million equivalent one-year Turkish lira CDs at a rate of 6 percent. Assume no other changes. What will the FI’s balance sheet look like…
Assume the following information regarding U.S. and European annualized interest rates: Currency U.S. Dollar ($) 4.5% Investment Rate Borrowing Rate 5.5% Euro (€) 5.1% 6.3% Golden R Inc. can borrow either $6 million or €5 million. The current spot rate of the euro is $1.02. Furthermore, Golden R Inc. expects the spot rate of the euro to be $1.35 in 60 days. What is Golden R. Inc.'s dollar profit from speculating if the spot rate of the euro is indeed $1.35 in 60 days? Your answer should be whole US dollars. No decimals.
Suppose that the annual interest rates on 6-months borrowing in Romania and the United States are 12.7 % and 0.8 %, respectively. The current spot rate RON/US$ is 4.00 and 6-months forward rate RON/US$ is 4.21. Would it be as a result of covered/uncovered interest arbitrage?
Assume the following information regarding U.S. and European annualized interest rates: Currency Lending Rate Borrowing Rate U.S. Dollar ($) 6.73% 7.20% Euro (€) 6.80% 7.28% Trensor Bank can borrow either $20 million or €20 million. The current spot rate of the euro is $1.13. Furthermore, Trensor Bank expects the spot rate of the euro to be $1.10 in 90 days. What is Trensor Bank's dollar profit from speculating if the spot rate of the euro is indeed $1.10 in 90 days? Group of answer choices $579,845. $583,800. $588,200. $584,245. $980,245.

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