Fund Y invests in Asian equity markets. The portfolio holdings include Chinese stocks valued at RMB2 million. Currently, the relevant spot exchange rate is MYR/RMB 1.6120 (1 MYR = 1.6120 RMB). You have decided to hedge against the currency risk by using a 3-month RMB/MYR forward contract with the same exchange rate as the spot.
Q: "If a firm is due to be paid in deutsche marks in two months, to hedge against exchange rate risk…
A: Hedging is a strategy adopted in financial derivative contracts to mitigate or reduce the foreign…
Q: Suppose you have a 1,200,000 US dollar payable coming due in June and that the spottoday is .98…
A: Hedging: Multinational companies with receivables and payables in several currencies seek to hedge…
Q: A U.S. Based company has a short-term cash balance of USD 10 million. The company intends to invest…
A: Implied rate is the difference between the current spot rate and future exchange rate. Therefore, as…
Q: Please use this information to answer the question below: A US firm's expected Accounts Receivables…
A: Given: Accounts receivables = EUR 15,000,000 Spot rate 1EURO = USD 1.25 Interest rate in US = 5%…
Q: An FI is planning to hedge its one-year, 100 million Swiss franc (SF)-denominated loan against…
A: Future contract Future contract are traded on exchange. Under the contract the purchaser of future…
Q: Assume that you are a U.S. investor. The nominal return on a U.S. bond is 5% and the nominal return…
A: The Uncovered Interest Rate Parity: The uncovered interest rate parity theory states that the…
Q: The interest on a risk free US treasury is 2.75%, while the interest on a risk free Lebanese…
A: Foreign Exchange Rate is the exchange rate at which the currency of one country exchanges with…
Q: Assume that Stevens Point Co. has net receivables of 150,000 Singapore dollars in 90 days. The spot…
A: Forward hedge is an agreement to buy or sell an asset at some future date at a stated price in…
Q: On 25 July of a particular year, an American firm decided to close its account at an Australian bank…
A: Hedging is a strategy used in risk management and it typically involves derivatives, options, and…
Q: Suppose a U.S. investor wishes to invest in a British firm currently selling for £100 per share. The…
A: Initial investment in Dollars = $24,000 Initial Investment in pounds = £12,000 Share price = £100…
Q: Assume the following information: 180-day U.S. interest rate 8% 180-day British interest…
A: Here, US Company exports goods to Britain. In 180 days US company will receive 400,000 pounds from…
Q: A firm in Germany expects to pay USD 900,000 in February. It is currently November and the Euro/USD…
A: Given: Contract value = Euro 125,000 Total amount required = USD 900000 Spot price ( November) 1…
Q: Suppose that the current spot exchange rate is €2.62/OMR and the one year forward exchange rate is…
A: Arbitrage is a process of buying & selling assets/currency in different markets and making…
Q: Suppose a U.S. investor wishes to invest in a British firm currently selling for 50 pounds per share…
A: percentage return formula: percentage return=p1-p0p0×100 where, p1=price next yearp0=price this year
Q: Your company has just exported crude palm oil to a Japanese customer. You will receive 30 million…
A: Exposure to trade is the risk that the exchange rate of the concerned countries would change.
Q: ABC Company, a British company, expects to receive $10,000,000 in 30 days. It wants to hedge its…
A: Forward is the contract made by two parties for deferring the transaction but the quantity and…
Q: Suppose your company needs to make a payment of 50 million Swiss franc one year from now, how would…
A: Payment obligation = 50 million Swiss franc Futures contract = 125,000 Swiss franc.
Q: Assume that interest rate parity holds. In the spot market 1 Japanese yen = $0.00905, while in the…
A: In this we have to use interest rate parity to get the required rate of interest rate.
Q: You are a Canadian exporter expecting a payment of USD 1M in three months. You want to hedge your…
A: As the Canadian exporters have speculated that the exchange rate might go up in the future,
Q: As a US exporter selling to Europe. You wish to hedge a 1,040,000 Euro to be received in 3 months…
A: Calculation of dollars received if U.S. exporter hedge the position with futures or if Exporter…
Q: Busco has a foreign-currency denominated payable, it can hedge by buying the foreign currency…
A: The put option: The currency put option gives the buyer a right but not the obligation to sell the…
Q: Shandra Corporation (a U.S.-based company) expects to order goods from a foreign supplier at a price…
A: A foreign exchange gain or loss occurs due to the difference between the exchange rate in the two…
Q: A commercial Bank in Zambia has a net profit after taxes of K10 million with an asset base of K100…
A: In this we have to determine the return on assets and return of equity.
Q: a) Assume the following information: 180‑day U.S. interest rate = 8% 180‑day British…
A: Forward hedging is used to protect from future price movement in the securities. It creates off…
Q: Suppose that the continuously compounded risk-free interest rates for 1-year, 2-year, and 3-year…
A: A currency swap is an agreement in which two parties exchange the principal and interest of a loan…
Q: A U.S. firm must repay a loan in Canadian dollar (CAD), principal plus interest totaling 50,000 CAD,…
A: Hi, since you have posted a question with multiple sub-parts, we will answer only the first three,…
Q: Assume the following information: 90-day Ghana interest rate = 4% 90-day South African interest rate…
A: The international financial market involves the fluctuation in the exchange rates of the currencies.…
Q: K-Roo Ltd., an Australian firm, has a USD 264 million payable in one year that it wants to hedge,…
A: The liability of K-Roo ltd will increase if the foreign exchange rate increases because K-Roo ltd…
Q: Suppose that the invester of GMO has an extra cash reserve of $700,000 to invest. The interest rate…
A: Arbitrage portfolio is one in which the company eanrs from the difference in the interest rate and…
Q: Suppose that the exchange rate is €1.25 = £1.00.Options (calls and puts) are available on the…
A: option 4 is correct sell 10 call options on the euro with a strike in dollars.
Q: A U.S. investor obtains Ghana cedis when the cedi is worth $.33 and invests in a one-year money…
A: The selling price of foreign market security = $0.26 The purchase price of foreign market security =…
Q: that Volt Cars Co. (a European company with headquarters in Luxembourg) will receive E154000 in 45…
A: to find the answer, first we will find the amount that Volt cars will receive if it hedges its…
Q: If an Australian based investor purchases a Euro-denominated Exchange Traded Fund (ETF) and the Euro…
A: ETF's or exchange-traded funds are funds purchased and sold on a stock exchange very similar to…
Q: Suppose that the return on a U.K. treasury bill is eight percent annum and the return on a U.S.…
A: Treasury bills are the money market instruments issued by the government for a fixed rate of return…
Q: What amount will Shandra Corporation report as foreign exchange gain or loss in net income for the…
A: Feb 20: Spot price = 1.36 per pound Duration of call option = 2 months Quantity = 100000 pounds…
Q: Assume that you are running an Australia based company which has an account payable of EUR 125,000…
A: In margin account, funds equal to the initial margin requirement is deposited initially at the…
Q: Suppose a German importer owes an Australian exporting company 150,000 AUD, due in three months.…
A: Exercise rate is the rate at which the currency will be exchanged for other currency in derivatives…
Q: In a market with an unchanged current exchange rate where the interest parity condition holds, if…
A: Interest rate parity is a no-arbitrage condition in which investors are unconcerned about interest…
Q: Assume that Stevens Point Co. has net receivables of 100,000 Singapore dollars in 90 days. The spot…
A: Money market hedge is using money market to hedge the risk of change in foreign currency…
Q: Busco has a foreign-currency denominated payable, it can hedge by buying the foreign currency…
A: Risk exposure refers to gain and loss due to changes in the value of exchange rates. The exchange…
Q: Select each of the following strategies that can be used to hedge the foreign exchange risk of a…
A: Foreign Exchange Risk is a financial risk that arises where a transaction or trade takes place…
Q: Suppose that investors are risk-neutral and the linear UIP equation holds. You are given the…
A: UK interest rate = 0.07 US interest rate = 0.02 Expected Future Spot Rate in pounds per dollar = 8…
Q: A is a U.S.-based MNC with AAA credit; B is an Italian firm with AAA credit. Firm A wants to borrow…
A: Here,
Q: Vicky Gomez, a foreign exchange trader at Wells Fargo, can invest $1M, or the foreign currency…
A: Arbitrage Profit: Arbitrage is defined as the profit made by purchasing and selling the same asset…
Q: Assume that interest rate parity holds and that 90-day risk-free securities yield 3% in the United…
A: The conceptual formula used:
Q: he U.S. interest rate is higher than the U.K. interest rate, will the U.K. investors place…
A: Exchange rates are governed by the inflation and the interest rate and change according to that.
Illustrate how the currency risk exposure can be hedged for Fund Y. Determine the payoff for the forward position if the exchange rate rises to MYR/RMB 1.6830 after 3 months.
Step by step
Solved in 3 steps
- Fred Bankman is a hedge fund manager. He has obtained the following exchange rate and interest rate quotations: Bid Ask Spot rate(dollars per euro) 1.0867 1.0871 One-year forward rate(dollars per euro) 1.1078 1.1083 Deposit Loan One -year euro interest rate 3.212% 3.356% One-year dollar interest rate 5.215% 5.316% Is there any arbitrage opportunity? if so, explain how Mr Bankman might make use of the opportunity and express his arbitrage profit in dollars. If not, explain why not.Assume that interest rate parity holds. In the spot market1 Japanese yen = $0.009144, while in the 90-day forward market 1 Japanese yen = $0.009184. In Japan, 90-day risk-free securities yield 2%. What is the yield on 90-day riskfreesecurities in the United States?The US 1 year spot rate is 3.61% and the Mexican 1 year spot rate is 7.44%. A US investor purchases a Mexican corporate bond with an expected 1 year return of 9.76%, as measured in Mexican peso. The current USD/MXP exchange rate is 0.18. If the investor decides to hedge the currency risk exposure in the forward market, what would be the expected return on this portfolio, if interest rate parity holds?
- 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). i) Find the forward exchange rate when the IRP holds. 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). iii) If the forward exchange rate is 1 euro = $1.23 (the IRP does not hold), from what market will you have more investment return (%)? Show your work.The 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.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 $1.10 per euro. Please list at least two derivatives and discuss your detailed strategy to hedge against this foreign exchange risk.
- Suppose that investors are risk-neutral and the linear UIP equation holds. You are given the following information: UK interest rate: i = 0.07 US interest rate: i* = 0.02 Expected future spot rate e^e = 8. What is the current spot rate, e? (State your answer as a number to 2 decimal places. Exchange rates are Pounds per Dollar, in natural logs)Assume that Stevens Point Co. has net receivables of 100,000 Singapore dollars in 90 days. The spot rate of the S$ is $.50, and the Singapore interest rate is 2% over 90 days. Suggest how the U.S. firm could implement a money market hedge. Be precise.The following information is the same for Questions 19 - 20. Currently, the spot exchange rate is USD/AUD = 0.85, and the one-year forward exchange rate is USD/AUD = 0.90. One-year risk-free interest rate is 5.5 % in Australia and 3.2% in the United States. You are the U.S. investor evaluating whether there is an opportunity for a covered interest rate arbitrage. You may borrow up to 1,000,000 USD or 1,176,470 AUD. Compute the risk-free arbitrage profit. 85,058 USD O45, 058 USD 38 USD 68,563 USD
- Allium Advisors, an international fund manager, plans to sell equities denominated in British pound (GBP) and purchase an equivalent amount of equities denominated in Egyptian Pound (EGP). The following are the current exchange rates between the EGP, GBP and USD. Maturity Spot 30-day 90-day EGP/USD 13.2913/68 35/65 52/48 GBP/USD 0.7936/79 53/33 22/40 Calculate: V. The 90-day annualized premium or discount GBP in EGPIn the spot market, 1 Philippine peso can be exchanged for 2.51 Japanese yen. In the 1-year forward market, 1 Philippine peso can be exchanged for 2.53 Japanese yen. The 1-year, risk-free rate of interest is 5 percent in the Philippines. If interest rate parity holds, what is the yield today on 1-year, risk-free Japanese securities?Please use this information to answer the question below: A US firm's expected Accounts Receivables in Euro Zone due in 1 year Current Spot Rate (SR) for EUR Annual interest rate in US (Rh) Annual interest rate in Euro Zone (RF) EUR 15,000,000 USD 1.25 5% O use a money market hedge O use a forward hedge 12% If the 1-year Forward rate for EUR is $1.15, then based on all information given above, the firm should: