I. (40 points)Mr. A, a foreign exchange trader in Tokyo, is exploring covered interest arbitragepossibilities. He wants to invest $6,000,000 or its yen equivalent for 180 days, in a coveredinterest arbitrage between U.S. dollars and Japanese yen. He faced the following exchangerate and interest rate quotes:Spot exchangerate:¥122.50/$180-day forwardexchange rate:¥116.80/$180-day dollarinterest rate:4.95% per year180-day yeninterest rate:2.35% per yeara. Is there a CIA possibility? Why? Answer this question first. Then you canproceed for b.b. Explain and diagram the specific steps he must take to make a coveredfor borrowing and whichinterest arbitrage profit. Show which currencycurrency is for investment.c. He is also exploring uncovered interest arbitrage. He forecasts the spotafter 180 days will be ¥114.00/$. Suppose the actual spot after 180 days is asforecasted, how much profit is to be made? Show which currency is forborrowing and which currency is for investment.

Part 2: Explanation:Step 1: Calculate the potential profit from covered interest arbitrage.To…

Answered: I. (40 points) Mr. A, a foreign…

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 7MC

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(a) Steven Kurakiis a foreign exchange trader at Goldman Sachs in Tokyo. He is exploring covered interest arbitrage possibilities. He wants to invest $5,000,000or its yen equivalent in a covered interest arbitrage between US dollars and Japanese yen. He faced the following exchange rate and interest rate quotes. Is covered interest arbitrage profit possible in 180 days? If so, how? Assuming there are 360 days a year. Spot rate (yen/$)118.6 Annual forward rate (yen/$)117.8 Annual US dollar interest rate4.8% Annual Japanese yen interest rate3.4% b. Steven Kuraki observes that the yen/$ spot rate has been holding steady and that both dollar and yen interest rates have remained relatively fixed over the past week. Steven wonders if he should try an uncovered interest arbitrage and thereby save the cost of forwarding cover. Many of Steven’s research associates and their computer models are predicting the spot rate to remainclose to yen118/$ for the coming 180 days. Using the same…
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.?
You are a currency trader specializing in the Japanese yen, and you are confident that the spot exchange rate will be *118 per dollar in six months based on your analysis. The current spot exchange rate is 123 per dollar, and the six-month forward rate is 113 per dollar. Assume that you would like to buy or sell *100,004,000. Use direct quotes in your calculations. Enter the numeric portion of your answer without the currency symbols. Required: a-1. How should you speculate in the forward market to make a profit? a-2. What is the expected dollar profit from speculation? b. What would be your speculative profit in dollar terms if the spot exchange rate turns out to be ¥117 per dollar in six months? Complete this question by entering your answers in the tabs below. Req A1 Answer is complete but not entirely correct. Req A2 Req B What would be your speculative profit in dollar terms if the spot exchange rate turns out to be X117 per dollar in six months? Note: Round intermediate…
a) Assume the following information: 180‑day U.S. interest rate = 8% 180‑day British interest rate = 9% 180‑day forward rate of British pound = $1.50 Spot rate of British pound = $1.48 Assume that a U.S. exporter will receive 400,000 pounds in 180 days. Would it be better off using a forward hedge or a money market hedge? Substantiate your answer with estimated revenue for each type of hedge. b) As treasurer of a U.S. exporter to Canada, you must decide how to hedge (if at all) future receivables of 250,000 Canadian dollars 90 days from now. Put options are available for a premium of $.03 per unit and an exercise price of $.80 per Canadian dollar (CA$). The forecasted spot rate of the CA$ in 90 days follows: Future Spot Rate Probability (%) $.75 50…
Suppose one-year German Treasury bill pays 4.13% and one-year Canadian Treasury bill pays 2.95%. The current spot exchange rate is 1 Euro (EUR)= 1.3694 Canadian dollar (CAD) and the one-year forward exchange rate is 1 EUR = 1.3335 CAD. How much arbitrage profit can an investor earn on an investment value of CAD 4 million Answer: CAD (DO NOT ROUND YOUR CALCULATIONS UNTIL YOU REACH THE FINAL ANSWER. ENTER YOUR RESPONSE ROUNDED TO TWO DECIMAL PLACES AND NO SEPARATOR FOR THOUSANDS.)
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
2. Suppose today's exchange rate is $1.23/€. The three-month interest rates on dollars and euros are 6% and 3 % (both anual rates), respectively. The three-month forward rate is $1.25. A foreign exchange advisory service has predicted that the euro will appreciate to $1.27 within three months. Consider 1 million euros. a.. How would you use forward contracts to speculate in the above situation? b. How would you use money market instruments (borrowing and lending) to speculate? C. Which alternatives (forward contracts or money market instruments) would you prefer? Why? d. Can you make profits without risks? If so, explain and calculate how you do that.
3. Suppose that the treasurer of IBM can borrow $100,000,000 or its gbp equivalent, and observes the following quotes: the 120-days interest rate is 8 percent per annum in the United States and 6 percent per annum in United Kingdom. Currently, the spot exchange rate is $1.20 per gbp and the 120-days forward exchange rate is $1.30 per gbp. Treasurer calculates possible future Spot exchange rate (in 120 days) considering PPP with expected inflation rates of 4 percent per annum in the United States and 2 percent per annum in United Kingdom. Calculate (if exists) Covered Interest Arbitrage and Uncovered Interest Arbitrage. Explain differences between CIA and UIA.
e) Suppose that the current spot exchange is: 1 BP (British pound) = $1.21. Use the following interest rates. The interest rate is 8% in the US market (home market). The interest rate is 3% in the UK market (foreign market). ii) Assume that the IRP holds (this means you use the IRP forward exchange rate found above). When you invest $10,000 in the UK market and at the same time, enter a currency forward contract to sell BP in a year under the assumption that the IRP holds, show that the return from your foreign investment is equal to the return that can be achieved from the US market (home market).
(a) Jade Smith is a foreign exchange trader for a bank in New York. He has $1 million for a short-term money market investment and he faces the following quotes: (Assuming there are 360 days a year) Spot exchange rate (SFr/$) 1.2810 3-month forward rate (SFr/$) 1.2740 US dollar annual interest rate 4.8% Swiss franc annual interest rate 3.2% He wonders whether he should invest in US dollars for 90 days or make a covered interest arbitrage (CIA) investment in the swiss franc, and what is the profit/loss if he carries out this investment. (b) Using the same values in the table above, Jade decides to seek the full 4.8% return available in the US dollars by not covering his forward dollar receipts – an uncovered interest arbitrage (UIA) transaction. What is the maximum expected spot exchange rate (SFr/$) at the end of the 90-day period at which Jade can avoid losing money?
You Answered Today you observe the folowing quotes: Spot EURUSD $1.37 60 Day Forward EURUSD = $1.15 In 60 day you expec to receive 281,718 Euros. In 60 days you expect the EURUSD exchange rate to be $1.17. In 60 days the EURUSD actually is $1.21. You decided to hedge your receivables with a forward. How many USD will you receive? 232,824.79
James Clark is a currency trader with Wachovia. He notices the following quotes: Spot exchange rate SFr1.2070 per s SFr1.1941 per $ Six-month forward exchange rate Six-month Dollar interest rate Six-month Swiss franc interest rate 2.5% per year 2.0% per year Required: a. Is the interest rate parity holding? You may ignore transaction costs. b. 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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