Suppose a European call option to buy 1 euro for 1.40 CAD costs 0.08 CAD. The option maturity is in two months and the forward exchange rate for the same maturity is 1.50 CAD per euro. What arbitrage opportunity exists? Explain how you can exploit this opportunity and how much the profit is. (Ignore the time value of money)
Q: The back of the book says the answer should be $7,413. Do you know what there would be a…
A: As per the given information: EOYCash flow0-$30,0001$6,0002$13,5003$X4$13,500 MARR - 12% per year To…
Q: d the present value of a 4-year $60 annuity when the stated rate is 6%, compounded monthly. Make…
A: Present value of annuity is equivalent value of today considering the the time and interest of the…
Q: process for producing the mosquito repellant Deet has an initial investment of $20,000 with annual…
A: Given, Initial investment of $20,000 Annual costs of $51,000 per year Income = $90,000 per year.…
Q: Barney and Alyson agree on the price calculated above. Ignoring tax and any other expenses, what is…
A: Given: Purchase price = $984.31767830979 Payments received = $37 Number of payments = 2 Sale value =…
Q: You are allocating your wealth between two shares, Tinkle.com and Circumbendibus Wheels. Tinkle.com…
A: To calculate the weight of any asset in a minimum variance portfolio we will use the below formula…
Q: Given an effective annual rate j₁ = 6.12500%, find the equivalent nominal rate ¡(12). O a. 4.82719%…
A: Effective annual rate is the rate where the interest is determined after considering the compounding…
Q: 1. Joe agrees to make the ff. payments from the lending investor End-of-year 1 2 3 45 5 Payment 5000…
A: Present value of annuity is the current value of the future payments that are calculated using the…
Q: 5. An investment you are considering is expected to make payments annually forever. The amount of…
A: Data given: A= Payment = $4.75 (payment to be made annually forever) g=growth = 2.9% P0= Current…
Q: Northwest Iron and Steel is considering getting involved in electronic commerce. A modest e-commerce…
A: Revenue is to be computed at the fair value of the consideration that is to be received or…
Q: A friend asks to borrow $51 from you and in return will pay you $54 in one year. If your bank is…
A: part A) : $54.162 B) 50.8474576271 or approx. 50.85 C) We should deposit the money in a bank because…
Q: A guy is wondering which account he should invest in Account A- earns an APR of 4% of compunded…
A: Account A APR = 4% or 0.04 Account B EAR = 4% or 0.04 We will calculate effective annual rate…
Q: The present value of the expected net cash inflows for a project will most likely exceed the present…
A: The question is related to Capital Budgeting. Cash flows means earnings after taxes but before…
Q: Type only your answer in the space provided below with the $ and no spaces, rounding the answer to…
A: The closing costs of a loan are the amount of upfront payment that a borrower needs to provide to…
Q: Nico bought 100 shares of Cisco Systems stock for R24.00 per share on January 1, 20019. He received…
A: Option b is the correct answer. Below you will find the explanation for the same.
Q: A bank made a farmer a loan of $1,00 loan. Compare the compound interes Future value= $0 (Round to…
A: Value or worth of money changes with passage of time. This is due to a theoretical concept in…
Q: Cristina borrowed P50,000.00 from Social Security System in the form of calamity loan, with interest…
A: When a loan is taken by a person then the institution or the entity that gives the loan amortizes…
Q: Felix is keen to apply his finance knowledge to his real-life investment goals. He is currently 19…
A:
Q: (Related to Checkpoint 9.2 and Checkpoint 9.3) (Bond valuation relationships) The 16-year, $1,000…
A: Time Period (Years) 16 Par Value $ 1,000.00 Coupon Rate 7% Market Price $ 1,075.00…
Q: The manager of the Top Star Bakery wishes to give each of 120 employees a holiday bonus. How much is…
A: An annuity is a series of equal payments that are made at equal intervals. It is useful in providing…
Q: 4 years ago, you purchased a corporate bond for R975.30. At the time, the bond had a YTM of 9.25%…
A: Given: Particulars Amount Present value (PV) $975.30 Years completed 4 Yield to…
Q: Company A B C D PE Ratio 22.50 24.20 20.00 60.00
A: The right statical tool to determine an aggregate is mean. Mean is calculated by taking the sum of…
Q: XYZ pty Ltd is considering investing in one of two outstanding bonds. The bonds offer 11% coupon…
A: Bond price is calculated as the sum of the present value of all the expected future coupon payments…
Q: John Smith has a credit card that charges 11% annual interest on the monthly average daily balance…
A: Average daily balance method Under the average daily balance method, interest is calculated on the…
Q: Four years ago, Sandra Stills bought six-year, 5.5 percent coupon bonds issued by the Oriole Corp.…
A: We have all the characteristics of a bond. We known the quantum and timing of cash flows emanating…
Q: ssuming that Icebreaker designates the forward contract as a fair value hedge of a foreign currency…
A: Journal entries
Q: A Hepplewhite sofa costs $3,200 in cash. Jaquanna Wilson will purchase the sofa in 24 monthly…
A: EMI or monthly mortgage payments are the fixed amount paid by the borrower to the lender that…
Q: You have invested in two shares, Tinkle.com and Circumbendibus Wheels. Tinkle.com has volatility…
A: Portfolio volatility is a measure of portfolio risk. The portfolio volatility shows the tendency of…
Q: You are using the CAPM to calculate a fair return for Stardust common stock. The shares have a…
A: Capital Asset Pricing Model helps in determining the fair value of the stock considering its…
Q: Assuming that a decedent left no valid last will and testament, which of the following assets will…
A: Solution: D) III and IV
Q: 4. (a) Suppose you decide to short sell some GameStop shares. Their cur- rent price is $5, and you…
A: Buying on margin When some amount can be borrowed for trading securities, it is said trading on…
Q: ending at t Consider a deferred annuity with 15 annual payments of $100 starting at time t = 6 and…
A: We have to necessarily find the PV of a deferred annuity. We will use the PV of an annuity formula…
Q: 12-25. Expert Analysts Resources (EAR) has provided you with the following information about three…
A: Degree of operating leverage - It is referred to as the percentage change in net operating income in…
Q: Phoenix Products Inc. requires a new machine to produce a part for a solar air conditioner. Two…
A: Rate of return can be calculated using internal rate of return(IRR). As per IRR: Lower…
Q: An investment you are considering is expected to make payments annually forever. The amount of the…
A: Given, The payment is $4.75 Growth rate is 2.9% Amount of investment is $80.
Q: Kindly analyze the following ratios: Debt-to-Equity Ratio Asset-to-Equity Ratio Asset-to-Liability…
A: Financial Ratios: The financial ratios are widely used tools to compare the financial performance of…
Q: A car dealer advertises the sale of a car model for a cash price of P880,000.00. If purchased on…
A: Down payment The first payment made by a buyer for the purchase made on credit. It is a percentage…
Q: Consider a two year put options with strike Price sh. 52 on a stick whose current price is sh.50.…
A: A European option allows the holder the right to exercise the option only at maturity. An American…
Q: (Related to Checkpoint 9.2) (Yield to maturity) The market price is $1,125 for a 17-year bond…
A: Information Provided: Market price = $1125 Bond maturity = 17 years Par value = $1000 Annual Coupon…
Q: a. The break-even point for operating expenses before and after expansion (in sales dollars). Note:…
A: Since you have posted a question with multiple sub-parts, we will solve first three subparts for…
Q: Over the next year, there is a 78% chance of the market being in state 1, otherwise it is in state…
A: The covariance between two stocks signifies the effect of one stock on the other stock and…
Q: Meadow Dew Corporation currently has an EPS of $3.80, and the benchmark PE for the company is 37.…
A: The Earnings per share is used to measure the performance of a company by finding out how much…
Q: Please calulate the Clean Bank's maturity gap.What does the maturity gap imply about the interest…
A: Maturity Gap is the difference between the interest sensitive assets and liabilities with respect to…
Q: The financial staff of Cairn Communications has identified the following information for the first…
A: Given: Particulars Amount Projected sales $22,000,000 Operating cost $9,000,000…
Q: You invest in a stock for four years. The returns for the four years are 20%, -10%, 15%, and -5%.…
A: Arithmetic Average return refers to the return on an investment which takes into consideration the…
Q: What is the market price of a $1,000, 5 percent bond paying a semiannual coupon if comparable market…
A: Par Value = $1,000 Time Period = 15 Years Coupon Rate = 5% (Semi-annual) Yield = 4%
Q: Cristina borrowed P50,000.00 from Social Security System in the form of calamity loan, with interest…
A: Annuity referes to a series of regular payments being made over a period. If the payments are made…
Q: This question assumes the standard mean-variance utility function. You are allocating your…
A: Mean variance analysis is done to understand which investment gives highest return for a given risk…
Q: Over the next year, the stock market will either be a bull market or a bear market. The probability…
A: Sharpe ratio heps in determining the performance of a stock with respect to the risk free rate after…
Q: OCF analysis
A: Operating Cashflow Analysis = Net Income + Depreciation and Amortization- Net Working capital
Q: Mr. Kato, who has a 35 percent marginal tax rate, must decide between two investment opportunities,…
A: The NPV is used to measure a project’s profitability. It uses the concept of TVM to discount future…
Suppose a European call option to buy 1 euro for 1.40 CAD costs 0.08 CAD. The option maturity is in two months and the forward exchange rate for the same maturity is 1.50 CAD per euro.
What arbitrage opportunity exists?
Explain how you can exploit this opportunity and how much the profit is. (Ignore the
Step by step
Solved in 2 steps
- Suppose the risk free rate in pounds (£) is 5.71% and the risk free rate in US dollars ($) is 7.95%. The current £ to $ exchange rate is 1.48 (so £1 can be exchanged for $1.48 with the money exchanged right now). You and a broker want to agree an exchange rate now for a £ to $ conversion, but where the money will be exchanged in precisely 30 months time. What exchange rate (£ to $) should you and your broker use to ensure there is no arbitrage?Question 2 In 6-month from today, a U.S. based company will receive 2,000,000 Australian dollars (AUD) and the company wants to hedge the exchange rate risk. The expected AUD spot rate in 6-month will either appreciate by 5% (p.a) with 40% probability or depreciate by 10% (p.a.) with 60% probability. All rates are continuous compounding (please round your answers to 4 decimals in the exchange rate calculations). As the financial manager of the company, you look at Bloomberg and collect the following information: • U.S. interest rate: . . 4% p.a. 5% p.a. 1 AUD=0.63 USD Spot rate: Call option premium 0.03 USD, with exercise exchange rate 1 AUD-0.65 USD and 6-month maturity Put option premium 0.02 USD, with exercise exchange rate 1 AUD-0.64 USD and 6-month maturity Australian interest rate: 1) Calculate the 6-month forward exchange rate, describe how a forward agreement can be used to hedge the receivable money, and calculate the resulting amount of USD in 6 months.Suppose there are no transaction costs. If the one year forward rate of the euro is an accurate estimate of the spot rate one year from now, then the actual cost of hedging payable will be: A. positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount. B. positive. C. negative. D. zero.
- You expect to incur a cost and make a payment of €35,000 in one year. The currentEUR/GBP exchange rate is £0.92 per euro. The current 1-year interest rates are:GBP 4%, EUR 5%. Explain what kind of risk you might be facing in the situationdescribed above. Provide an example of a forward contract that you would use inorder to hedge against the relevant exchange rate risk. Analyse the possibleoutcomes of your strategy if the EUR/GBP exchange rate in one year is (1) £0.89per euro, and (2) £0.98 per euro.Suppose that the interest rates in the U.S. and Germany are equal to 5%, that the forward (one year) value of the € is F$/€ = 1$/€ and that the spot exchange rate is E$/€ = 0.75$/€. Please answer the following questions by explaining all steps of your analysis: Does the covered interest parity condition hold? Why or why not? How could you make a riskless profit without any money tied up assuming that there are no transaction costs in buying and or selling foreign exchange? PLEASE SHOW ALL STEPSThis question will compare two different arbitrage situations. Recall that arbitrage should equalize rates of return. We want to explore what this implies about equalizing prices. In the first situation, two assets, A and B, will each make a single guaranteed payment of $100 in 1 year. But asset A has a current price of $80 while asset B has a current price of $90.a. Which asset has the higher expected rate of return at current prices? Given their rates of return, which asset should investors be buying and which asset should they be selling?b. Assume that arbitrage continues until A and B have the same expected rate of return. When arbitrage ceases, will A and B have the same price?Next, consider another pair of assets, C and D. Asset C will make a single payment of $150 in one year while D will make a single payment of $200 in one year. Assume that the current price of C is $120 and that the current price of D is $180.c. Which asset has the higher expected rate of return at current…
- Using the UIP equation, assume that the expected future rate (after one year) for euros (in terms of dollars) equals $1.20, while the current spot rate is 1.15. The current interest rate on euro deposits is 2%, and the interest rate on dollar deposits is 3%. Should you invest in the US or in Europe? Neither one In the US In Europe It is indifferentThe current spot exchange rate is $1.60/€ and the three-month forward rate is $1.55/€. Based on your analysis of the exchange rate, you are confident that the spot exchange rate will be $1.62/€ in three months. Assume that you would like to buy or sell €1,000,000. What actions do you need to take to speculate in the forward market? What is the expected dollar profit from speculation? A. Sell €1,000,000 forward for $1.60/€, and you expect to gain $20,000. B. Buy €1,000,000 forward for $1.55/€, and you expect to gain $70,000. C. Wait three months, if your forecast is correct buy €1,000,000 at $1.62/€. D. Buy €1,000,000 forward for $1.60/€, and you expect to gain $20,000.3. You are to receive €400,000 in 90 days. a) Demonstrate how you would set up an options hedge. b) If the spot rate in 90 days is $1.10/€1.00. You receive the €400,000 and you exchange the euros into dollars. What is the net amount of dollars you receive and what is the dollar/euro exchange rate for the €400,000?
- Analyse the scenario below. In each case, explain your reasoning Suppose that the current EUR/GBP exchange rate is £0.92 per euro. The current2-year interest rates are: GBP 4%, EUR 5%. Suppose further that you can use a 2-year forward contract with a EUR/GBP rate of £0.91 per euro. Could this contractbe used for an arbitrage opportunity? If yes, provide an example. Calculatearbitrage profit and explain how this profit can be earnedSuppose that investors are risk-neutral and the linear UIP equation holds. You are given the following information: UK interest rate: i = 0.07 US interest rate: i* = 0.02 Expected future spot rate e^e = 8. What is the current spot rate, e? (State your answer as a number to 2 decimal places. Exchange rates are Pounds per Dollar, in natural logs)If the spot price of the euro is $1.10 per euro and the 30-day forward rate is believe that the spot rate in 30 days will be $1.05 per $1.00 per euro, and euro, then you can try to maximize speculative gains by buying euros in the current spot market and selling euros in 30 days at the future spot rate. you signing a forward foreign exchange contract to sell euros in 30 days. signing a forward foreign exchange contract to sell dollars in 30 days. buying dollars in the spot market and selling the dollars in 30 days at the future spot rate.
