Doug Bernard specializes in cross-rate arbitrage. He notices the following quotes: Swiss franc/dollar-SFr1.5971/$ Australian dollar/U.S. dollar = A$1.8215/$ Australian dollar/Swiss franc - A$1.1440/SFr Ignoring transaction costs, does Doug Bernard have an arbitrage opportunity based on these quotes? If there is an arbitrage opportunity, what steps would he take to make an arbitrage profit, and how much would he profit if he has $1,000,000 available for this purpose? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Arbitrage profit

Doug Bernard specializes in cross-rate arbitrage. He notices the following quotes: Swiss franc/dollar-SFr1.5971/$ Australian dollar/U.S. dollar = A$1.8215/$ Australian dollar/Swiss franc - A$1.1440/SFr Ignoring transaction costs, does Doug Bernard have an arbitrage opportunity based on these quotes? If there is an arbitrage opportunity, what steps would he take to make an arbitrage profit, and how much would he profit if he has $1,000,000 available for this purpose? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Arbitrage profit

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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To hedge payables, the firm will purchase a currency call option on the payable foreign currency. The firm can use the call option to buy foreign currency at a specified price. Why should the company, in this case, purchase a call option than a Forward contract? Maybe to make it easy on me, you can illustrate the answer by highlighting the situations suitable for options and Forward contracts. For example, "when this situation occurs....., then that hedging we should use .... because of XYZ reasons/effects on profitability".
6) Suppose that the European central bank increased money supply right after you bought the European financial assets. How that change might affect the expected return you will get at the end of the period as an American investor? (Use graphs)
Does arbitrage destabilize foreign exchange markets? If yes, which argument do yousupport? offer your own opinion on this issue.
For an investor who starts with dollars and wants to end up with dollars, which of the following choices is an example of speculating in the FX market? Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and sign a forward exchange contract to buy the foreign currency. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and sign a forward exchange contract to buy dollars. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and then buy dollars at the future spot rate. Buy a dollar-denominated financial asset.
What is arbitrage? Indicate the forms of arbitrage that we can apply to the foreign exchange market.
Suppose you are working for a company based in Ireland (where the euro is used). This company exports product to the UK, but invoices its prices in euros (instead of pounds). Suppose you believe the euro will appreciate versus the pound over the coming year. Would that impact the profitability of your company this year? If not, explain. If so, explain how (and the type of risk you’re facing.
One of the issues that companies need to address when dealing with foreign currencies is how fluctuations in that currency are handled. What is the dual transaction approach, accrual perspective? How might a company account for exchange rate fluctuations using this approach?
Which of the following is/are TRUE with respect to spot market liquidity? I. The market liquidity improves if more buyers and sellers willing to participate in the currency trading. II. The spot markets for heavily traded currencies such as the Euro and Pound are very liquid. III. A currency's liquidity affects the ease with which an MNC can obtain or sell that currency. IV. If a currency is illiquid, an MNC is typically able to quickly purchase that currency at a reasonable exchange rate. A. I, II, III B. I, III, IV C. II, III, IV D. I, II
True/false : International Financial Management: 1. Forward contracts are often valued at £1 million or more, and are not normally used by consumers or small firms. (a) True (b) False 2. Governments may influences the equilibrium exchange rate by affecting macro variables such as inflation, interest rates, and income levels. (a) True (b) False 3. A forward contract is an agreement to buy or sell an asset in the future at prices agreed upon today. (a)True (b) False
Assume your firm has transferred you to Zurich Switzerland. You work in the triangular arbitrage division. View the following exchange rates. Is an arbitrage opportunity available? If not, explain why an opportunity does not exist. If so, from the Swiss point of view show how to exploit the opportunity. CHF .8976 = $1.00, $.0130 = INR 1.00, INR 92.7904 = CHF 1 Now say instead of working in Zurich, you were employed in Mumbai, India. How does that change your thinking on the arbitrage? PLEASE ANWSER CORRECTLY AND SHOW WORK
A key issue facing financial executives of multinational firms is exposure to exchange rate changes.a. Define exposure, differentiating between accounting and economic exposure. What role does inflation play?b. Describe at least three circumstances under which economic exposure is likely to exist? c. Of what relevance are the international Fisher effect and purchasing power parity to your answers to parts a and b? d. What is exchange risk, as distinct from exposure
a)explain how to price a currency swap if either set of payments is at a floating rate. b)explain how a currency swap can be used to convert a loan in one currency into a loan in another currency, and provide some reasons for doing so. c)demonstrate that a currency swap contract is equivalent to a series of forward contracts. d)explain how a currency swap can be used to hedge a stream of foreign cash flows. e)define interest rate derivatives, and compare and contrast them against bond derivatives.

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