ange exposure. a. Enter into a FX spot contract today, purchasing foreign currency and selling US dollars b. Sell an FX option today to a Bank, giving the Bank the right but not the obligation to sell to Roberts 50,000 foreign currency and buy US dollars in 60 days. c. Enter into an FX forward today buying foreign currency and selling US dollars for settlement in 60 days d. Enter into an FX forward today buying US dollars and selling foreign currency for settlement in 60 days. e. Buy an FX option today giving Roberts the right but not the obligation to buy 50,000 foreign

ange exposure. a. Enter into a FX spot contract today, purchasing foreign currency and selling US dollars b. Sell an FX option today to a Bank, giving the Bank the right but not the obligation to sell to Roberts 50,000 foreign currency and buy US dollars in 60 days. c. Enter into an FX forward today buying foreign currency and selling US dollars for settlement in 60 days d. Enter into an FX forward today buying US dollars and selling foreign currency for settlement in 60 days. e. Buy an FX option today giving Roberts the right but not the obligation to buy 50,000 foreign

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter5: Currency Derivatives

Section: Chapter Questions

Problem 1SBD

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Similar questions

An Omani importer will receive commodities from USA and he has to pay an amount of USD 250,000 next month. Which of the below markets is well suited to offer hedging protection against this transactions risk exposure? a. Inflation rate market O b. Transactions market C. Spot market O d. Forward market
1. The following Information should be used for Questions 1 and 2. The treasurer of X wants to hedge an exposure to currency risk. X is a company whose domestic currency is the euro, and the company must make a payment of US $500 000 to a US supplier in 6 months' time. The following market rates are available: Exchange rates: $ per €1 Spot= 1.604 ± 0.002 6 months forward= 1.570 ± 0.004 6 month interest rates: Euro Borrowing= 4.8%. Euro Deposits= 4.4% US dollar Borrowing= 2.5%. US dollar Deposits= 2.0%. What would be the euro cost to X if he hedges through a forward contract? (a) Euro 326, 495 (b) Euro 319, 285 (c) Euro 313, 525 (d) Euro 333, 295 2. What would be the cost to X if he hedges through the money market? (a) USD 634, 631 (b) USD 631, 634 (c) Euro 316, 634 (d) Euro 316, 436
As the chief financial officer of a U.S. firm, you expect to receive payment of €1 million in 90 davs. The current spot rate is $1.40 per euro. Your firm will incur losses on the deal if the dollar weakens to less than $1.10 per euro. Please list at least two derivatives and discuss your detailed strategy to hedge against this foreign exchange risk.
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 $945, how do you arbitrage this position? How many times should you make this trade? How likely is it that your friend’s information is current and correct?
James Clark is a foreign exchange trader with Citibank. He notices the following quotes. (12’)Spot exchange rate SFr1.2051/$Six-month forward exchange rate SFr1.1922/$Six-month $ interest rate 2.5% per yearSix-month SFr interest rate 2.0% per yeara. Is the interest rate parity holding? You may ignore transaction costs.b. Is there an arbitrage opportunity? If yes, show what steps need to be taken to make arbitrage profit. Assuming that James Clark is authorized to work with $1,000,000, compute the arbitrage profit in dollars.?
4.ABC Company, a British company, expects to receive $10,000,000 in 30 days. It wants to hedge its foreign currency risk in the forward market. The forward price of the pound contract is 0.74 pounds/$. What foreign currency risk is ABC most likely trying to hedge by entering the forward market? A. The pound increasing in value over the next 30 days B. The dollar increasing in value over the next 30 days C. The pound increasing in value after 30 days.
Consider a US company, GateCorp, that exports products to the United Kingdom. GateCorp has just closed a sale worth £200,000,000. The amount will be received in two months. Because it will be paid in pounds, the US company bears the exchange risk. In order to hedge this risk, GateCorp intends to use a forward contract that is priced at $1.4272 per pound. Indicate how the company would go about constructing the hedge. Explain what happens when the forward contract expires in two months.
The company hired You as a financial consultant to manage the currency risk. You expect that the US’ rate will increase by 500 base point on 6 month rate. You convince the company to sign a forward contract with The Arab Bank. 1. What kind of forward exchange rate should the company sign with the Arab bank. Which currency would you choose to be long and which currency short. Explain why 2. Suppose when you called the Arab bank, they told you that the 6 month forward rate is 0.74J/$. 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.
(5)Assume the following information: 90-day U.S. interest rate 90-day Malaysian interest rate 90-day forward rate of the Ringgit Spot rate for the Ringgit 4% 3% $0.400 $0.404 Assume ABC based in NYC needs 600,000 ringgits in 90 days to pay for its imports and wishes to hedge its payable position. Would it be beneficial to engage in forward hedge or a money market hedge? Hint: Find the cost for each type of Hedge and compare the results.
James Clark is a currency trader with Wachovia. He notices the following quotes: Spot exchange rate SFr1.2066 per $ Six-month forward exchange rate SFr1.1937 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.
Suppose the spot rate of the yen today is $0.0100 while the three-month forward rate is $0.0096. How can a U.S. exporter who is to receive 350,000 yen in three month hedge its foreign exchange risk? What happens if the exporter does not hedge and the spot rate of the yen in three months is $0.0098?
A multinational corporation based in the United States expects to receive a large payment in euros from its European client in six months. The corporation wants to hedge against potential depreciation of the euro. Which specific forward contract(s) could the company use to mitigate the currency risk? Select all that apply: Buy U.S. dollars forward against euros Sell U.S. dollars forward against euros Buy euros forward against U.S. dollars Sell euros forward against U.S. dollars