Consider the following situation. It costs $1.2900 to purchase £1 for immediate delivery. UK interest rates are 0.75% p.a. US interest rates are 1.5% p.a. What must be the 1 year forward rate at which you can purchase £ with $? Assume that there is no default risk, no transaction costs, no bid-ask spreads, etc. Provide your answer to 4 decimatplaces, for example, if you think the answer is 1.2900 $/£, enter '1.2900' Answer:

Consider the following situation. It costs $1.2900 to purchase £1 for immediate delivery. UK interest rates are 0.75% p.a. US interest rates are 1.5% p.a. What must be the 1 year forward rate at which you can purchase £ with $? Assume that there is no default risk, no transaction costs, no bid-ask spreads, etc. Provide your answer to 4 decimatplaces, for example, if you think the answer is 1.2900 $/£, enter '1.2900' Answer:

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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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)
1. Using the information in this module, please compute the Black Scholes Merton price of a European Call Option (BY HAND) with the following characteristics: S = 50 K = 50 Sigma = 30% r = 1.00% T = 6 months D = 0 Please scan or take a picture of this document and upload to Canvas.
ou invest $1000at time t=0 and an additional $5000 at time t=1/2. At time t=1/2 you have $1300 in your account and at time t=1 you have $6100 in your account. Find the dollar-weighted rate of return rd and the time-weighted rate of return rt on this investment.
This 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 $180.c. Which asset has the higher expected rate of return at current…
The following is the spot and forward rates of dollar against Euro. Spot 30-day forward Euro/$ 0.85 0.90 You sign a contract for selling John Deere with the amount of 1 billion euros that will be delivered in 30days. You expect the 30day later the spot rates of dollar to be 0.75 with 50% chance and 0.95 with 50%. What is the expected dollar amount if no forward has been used? As a risk-neutral person, is it a good idea to use the forward?
Suppose that you have the following utility function: U=E(r) – ½ Aσ2 and A=3 Suppose that you have $10 million to invest for one year and you want to invest that money into ETFs tracking the S&P 500 (US) and S&P/TSX 60 (Canada) index, which are often used as proxies for the US and Canadian stock markets, respectively, and the Canadian one-year T-bill. Assume that the interest rate of the one-year T-bill is 0.35% per annum. You have found two ETFs that you are interested in. From a set of their historical data between 2001 and 2019, you have estimated the annual expected returns, standard deviations, and covariance as follows: ETFUS : E(r)= 0.070584 0.173687 ETFCDA : E(r)= 0.073763 0.16816 Covariance between ETFUS and ETFCDA = 0.02397 Answer the following questions using Excel: Draw the opportunity set offered by these two securities (with increments of 0.01 in weight). Hint: In Excel, calculate the portfolio expected return and…
Suppose that you have the following utility function: U=E(r) – ½ Aσ2 and A=3 Suppose that you have $10 million to invest for one year and you want to invest that money into ETFs tracking the S&P 500 (US) and S&P/TSX 60 (Canada) index, which are often used as proxies for the US and Canadian stock markets, respectively, and the Canadian one-year T-bill. Assume that the interest rate of the one-year T-bill is 0.35% per annum. You have found two ETFs that you are interested in. From a set of their historical data between 2001 and 2019, you have estimated the annual expected returns, standard deviations, and covariance as follows: ETFUS : E(r)= 0.070584 0.173687 ETFCDA : E(r)= 0.073763 0.16816 Covariance between ETFUS and ETFCDA = 0.02397 Answer the following questions using Excel: Determine your optimal asset allocation among ETFUS , ETFCDA , and T-bill, in percentage and in dollar amounts. Also submit an Excel file to show your…
Suppose that you have the following utility function: U=E(r) – ½ Aσ2 and A=3 Suppose that you have $10 million to invest for one year and you want to invest that money into ETFs tracking the S&P 500 (US) and S&P/TSX 60 (Canada) index, which are often used as proxies for the US and Canadian stock markets, respectively, and the Canadian one-year T-bill. Assume that the interest rate of the one-year T-bill is 0.35% per annum. You have found two ETFs that you are interested in. From a set of their historical data between 2001 and 2019, you have estimated the annual expected returns, standard deviations, and covariance as follows: ETFUS : E(r)= 0.070584 0.173687 ETFCDA : E(r)= 0.073763 0.16816 Covariance between ETFUS and ETFCDA = 0.02397 Answer the following questions using Excel: What is the optimal portfolio of ETFUS and ETFCDA? Also submit an Excel file to show your work.
The British pound (GBP) is currently priced at $1.50 and the Swiss Franc (SF) is priced at $0.50, while the quoted cross rate is 1GB =3.50 SF. If you have $1,000, can you make an arbitrage profit? If so, describe the steps required to create the opportunity and show the profit. If there is no arbitrage profit opportunity, describe how you arrived at that decision.
Please no written by hand solution Suppose you observe the following rates in a market. $0.80 = 1.0 euros $1.50 = 1.00 pounds 0.55 pound = 1.00 euro If you have $1 million, you will get arbitrage profits by buying a currency with $1 million, then buying another currency with the currency you bought, and lastly buying dollars with the currency you bought. The arbitrage profit with the operation will be ?
Your firm purchased an equipment from a British company. Total cost was £50,000 (in 30 days). The pound is expected to appreciate against $ substantially in 30 days. Let's suppose it would be $1.6/£ in 30 days. Questions: 1. You decide to use option to hedge against the exchange rate risk. What would be your maximum (or minimum) strike price if it is possible for you to find that strike price? 2. After you bought the option, the spot exchange rate in 30 days turns out to be lower than the strike price. What would you do and what do you need to do?
Suppose you are offered a project with the following payments: Year Cash Flows 0 $ 9,800 1 −5,300 2 −4,000 3 −3,100 4 −1,700 a. What is the IRR of this offer? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. b. If the appropriate discount rate is 15 percent, should you accept this offer? c. If the appropriate discount rate is 21 percent, should you accept this offer? d-1. What is the NPV of the offer if the appropriate discount rate is 15 percent? Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. d-2. What is the NPV of the offer if the appropriate discount rate is 21 percent? Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.

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