Suppose that your company will be receiving 30 million euros six months from now and the euro is currently selling for 1 euro per dollar. If you want to hedge the foreign exchange risk in this payment, what kind of forward contract would you want to enter into?
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Suppose that your company will be receiving 30 million euros six months from now and the euro is currently selling for 1 euro per dollar. If you want to hedge the foreign exchange risk in this payment, what kind of forward contract would you want to enter into?
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- 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.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.You have bid for a possible export order that would provide a cash inflow of €1 million in 6 months. The spot exchange rate is USD1.31 = EUR1, and the 1-year forward rate is USD1.29 = EUR1. There are two sources of uncertainty: (i) The euro could appreciate or depreciate, and (i) you may or may not receive the export order. Fill in the following table to illustrate in each case the profits or losses that you would make if you sell €1 million forward by filling in the following table. Assume that the exchange rate in 1 year will be either USD1.21 = EUR1 or USD1.41 = EUR1. (Negative values should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places.) Total Profit/Loss (in millions) Spot Rate Receive Order Lose Order USD1.21 = EUR1 USD1.41 = EUR1
- A Japanese exporter has a €1,000,000 receivable due in one year. To hedge the position, you will buy put options on euro True or False?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 you are the CFO of Google with an extra U.S. $20 Million to invest for one year. You are considering the purchase of U.S. T-bills that yield 4% per year. The spot exchange rate is $1.00 = €0.90, and the one-year forward rate is $1.00 = €0.95 . What must the interest rate in the Eurozone (on an investment of comparable risk) be before you are willing to consider investing there instead of the US? a. 9.78% b. 1.56% c. 4.00% d. 5.56%
- Suppose you, a German importer, expect to pay $1 million in 90 days for taking delivery of import goods from a U.S. exporter. St = $1.14/€; Ft, k = $1.16/€, where k =90 days. If St+k = $1.15/€, what would be the gain or loss from the forward hedge relative to remaining unhedged?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 $20,000.Suppose that the current spot exchange rate is €1.72 per £ and the one-year forward exchange rate is €1.80 per £. The one-year interest rate is 5.4% in euros and 5.2% in pounds. You can borrow at most €1,000,000 or the equivalent pound amount, i.e., £581,395, at the current spot exchange rate. Required: a. If you are a euro-based investor, how can you realize a guaranteed profit from covered interest arbitrage and the size of arbitrage profit? b. How will the interest rate parity be restored as a result of the above transactions? c. If you are a pound-based investor, what is the covered arbitrage process and the size of the arbitrage profit? Complete this question by entering your answers in the tabs below. Required A Required B Required C If you are a euro-based investor, how can you realize a guaranteed profit from covered interest arbitrage and the size of arbitrage profit? Note: Do not round intermediate calculations. Round off the final answer to nearest whole dollar. Profit from…
- Suppose that the interest rates in the U.S. and Germany are equal to 5%, that the forward (one year) value of the € is F$/€ = 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 STEPSA US company needs to make a one-time payment of 50 million dollars in Mexican Pesos in about 6 months, and would like to hedge against the risk that exchange rates may change. Describe in words the hedging strategy that the company should take. Remember that a possible answer is that the company should not be hedging at all.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)