A friend of yours tells you that in Japan a specific Japanese treasury note matures for $1000 in two years can be bought or sold for $925. What is the annualized risk-free rate in this example? ) You happen to notice the same security can be purchased or sold domestically for $945, how do you arbitrage this position? How many times should you make this trade? How likely is it that your friend’s information is current and correct

A friend of yours tells you that in Japan a specific Japanese treasury note matures for $1000 in two years can be bought or sold for $925. What is the annualized risk-free rate in this example? ) You happen to notice the same security can be purchased or sold domestically for $945, how do you arbitrage this position? How many times should you make this trade? How likely is it that your friend’s information is current and correct

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter27: Multinational Financial Management

Section: Chapter Questions

Problem 8Q

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The company hired You as a financial consultant to manage the currency risk. You expect that the US’ rate will increase by 500 base point on 6 month rate. You convince the company to sign a forward contract with The Arab Bank. 1. What kind of forward exchange rate should the company sign with the Arab bank. Which currency would you choose to be long and which currency short. Explain why 2. Suppose when you called the Arab bank, they told you that the 6 month forward rate is 0.74J/$. If the rate is wrong, explain how would you take advantages of this mistake? Explain How it works- draw a clear draft. 3. How much would be your profit/Loss given that your expectation materialized- the US gov increase the rate by 500 point.
If a French citizen deposits $10,000 in Chase Bank inNew York, have Eurodollars been created? What if the deposit is made inBarclays Bank in London? Chase’s Paris branch? Does the existence of theEurodollar market make the Federal Reserve’s job of controlling U.S. interest rates easier or more difficult? Explain.
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James Clark is a currency trader with Wachovia. He notices the following quotes: Spot exchange rate SFr1.2070 per $ Six-month forward exchange rate SFr1.1941 per $ Six-month Dollar interest rate 2.5% per year Six-month Swiss franc interest rate 2.0% per year Required: Is the interest rate parity holding? You may ignore transaction costs. What steps should be taken to make arbitrage profit? Assuming that James Clark is authorized to work with $1,000,000. Compute the arbitrage profit.
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You are a U.S. importer and just placed an order of antiques worth £100,000 from a U.K supplier. You owe £100,000 to the U.K seller in one year. You are concerned about the dollar cost of this purchase in one year and decide to hedge your exchange rate risk using money market hedge. The current spot exchange rate is $1.40/£, and the forward exchange rate is $1.35/£. The U.S. interest rate is 2.00%, and the U.K. interest rate is 4.00%. What will be the total dollar cost of this purchase in one year with money market hedge? Enter only the numeric portion of your answer.
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