Heidi Høi Jensen, a foreign exchange trader at J.P. Morgan Chase, can invest $15 million, or the foreign currency equivalent of the bank's short term funds, in a covered interest arbitrage with Denmark. Heidi plans to use the following quotes to make a covered interest arbitrage (CIA). Assumptions Arbitrage funds available Spot exchange rate (kr/S) 3-month forward rate (kr/S) US dollar 3-month interest rate Danish kroner 3-month interest rate Value $15,000,000 5.1197 5.1611 4.4679% 8.0239% Because for this level of analysis/problems, small differences in % lead to arbitrage profit/losses, please always use 4 digits in your calculations For your answer (since this is a dollars answer), round your answer to the nearest $0.01 (use 2 decimals). DO NOT USE commas to separate thousands. For negative results, enter the minus (-) symbol in front of the first digit/#. For example, if your answer is $4,000,287.329; then enter 4000287.33; if your answer is $400 then enter 400.00 If Heidi makes the covered interest arbitrage (CIA), what is the amount of the CIA profit if there is one?

Heidi Høi Jensen, a foreign exchange trader at J.P. Morgan Chase, can invest $15 million, or the foreign currency equivalent of the bank's short term funds, in a covered interest arbitrage with Denmark. Heidi plans to use the following quotes to make a covered interest arbitrage (CIA). Assumptions Arbitrage funds available Spot exchange rate (kr/S) 3-month forward rate (kr/S) US dollar 3-month interest rate Danish kroner 3-month interest rate Value $15,000,000 5.1197 5.1611 4.4679% 8.0239% Because for this level of analysis/problems, small differences in % lead to arbitrage profit/losses, please always use 4 digits in your calculations For your answer (since this is a dollars answer), round your answer to the nearest $0.01 (use 2 decimals). DO NOT USE commas to separate thousands. For negative results, enter the minus (-) symbol in front of the first digit/#. For example, if your answer is $4,000,287.329; then enter 4000287.33; if your answer is $400 then enter 400.00 If Heidi makes the covered interest arbitrage (CIA), what is the amount of the CIA profit if there is one?

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter8: Relationships Among Inflation, Interest Rates, And Exchange Rates

Section: Chapter Questions

Problem 46QA

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Heidi Høi Jensen, a foreign exchange trader at J.P. Morgan Chase, can invest $5 million, or the foreign currency equivalent of the bank's short term funds, in a covered interest arbitrage with Denmark. Assumptions Arbitrage funds available Spot exchange rate (kr/$) 3-month forward rate (kr/S) US dollar 3-month interest rate Danish kroner 3-month interest rate Value $5,000,000 6.1720 6.1980 4.000% a) 5.000% a) kr Equivalent kr 30,860,000 Heidi Høi Jensen generates a covered interest arbitrage profit because, although U.S. dollar interest rates are lower, the U.S. dollar is selling forward at a premium against the Danish krone. What is the amount of that profit? kr21,102 kr34,750 kr24,250 kr54,150
Vicky Gomez, a foreign exchange trader at Wells Fargo, can invest $1M, or the foreign currency equivalent of the bank's short term funds, in an uncovered or covered interest arbitrage with the United Kingdom. Arbitrage funds available to invest: $1M( or the equivalent in pounds) Spot rate ($/Ł) : 1.9422 90-day forward exchange rate ($/Ł): 1.9150 Expected 90-day spot exchange rate ($/Ł): 1.8810 U.S. dollar 90-day interest rate: 2.000% U.K. pound 90-day interest rate: 5.900% A.Should Vicky make an covered investment in the UK? Show work and give answer. B. Shoudl Vicky make an uncovered investment in the UK? Show work and give answer.
XYZ Corporation, located in the United States, has an accounts payable obligation of ¥1500 million payable in six months to a bank in Tokyo. The current spot rate is ¥116/$1.00 and the six month forward rate is ¥109/$1.00. The annual interest rate is 3 percent in Japan and 6 percent in the United States. a) What is the future dollar cost of meeting this obligation using the money market hedge a. $92,307. b. $ 19582168.89 c. $13054779.26 d. $ 6589854.111
James Clark is a foreign exchange trader with Citibank. He notices the following quotes. Spot exchange rate Six-month forward exchange rate Six-month $ interest rate Six-month SFr interest rate USD1.2051/SFr USD1.1922/SFr 8% per year 10% per year Is there an arbitrage opportunity? If yes, determine the arbitrage profit in Swiss Francs. Assume that James Clark is authorized to work with $1,000,000. Input your answer without any currency information.
An investor has $10m to invest and has the following options: 1) depositing it in a US bank account paying 3% annually, or 2) depositing it in a German bank, where the annual rate of interest is only 2%. Assume that today the current spot exchange rate for the Euro is given as $1.2750, while the 1-year Dollar-Euro forward rate is posted as 1.2995. a. Based on your knowledge of the relationship between interest rate differentials and the current dollar-euro forward premium or discount, in which country should the investor deposit her money? why? b. If you had the power to adjust the German interest rate, with all else constant, what rate would you establish, such that the investor is totally indifferent between depositing in either countries? Show your work and the logic behind it.
James Clark is a foreign exchange trader with Citibank. He notices the following quotes: Spot exchange rate USD 1.2051/CHF One-year forward exchange rate USD 1.1922/CHF One-year $ interest rate 8% per year One-year CHF interest rate 10% per year Is there an arbitrage opportunity? If yes, determine the arbitrage profit in Swiss Francs. Assume that James Clark is authorized to work with $1,000,000.
One year borrowing and deposit interest rates are 12.5% and 10.5% respectively in the US and 10.5% and 8.5% respectively in Germany. The spot exchange rate for the US dollar is $1.50 to the EURO. The 12-month forward rate is $1.55.i) Assuming you do not have any initial investment funds, suggest a way you might profit from the pricing inconsistency presented above. Start with a borrowing amount and then explain and calculate the gain/loss with the rates that you will borrow and deposit.ii) Will the situation persist forever? Explain your answer.
The forward rate of the Swiss franc is $0.50. The spot rate of the Swiss franc is $0.48. The following interest rates exist: U.S. Switzerland 360-day borrowing rate 7% 5% 360-day deposit rate 6% 4% You need to purchase SF200,000 in 360 days. If you use a money market hedge, the amount of dollars you need in 360 days is ______. A. $101,904 B. $101,923 C. $96,914 D. $98,770
An Australia based company takes a US$1 million £ variable rate loan in the United Kingdom at LIBOR + 2%. Identify the risks on this financial transaction Identify possible ways to manage the associated risk.Describe ways to hedge FX risk onlyDescribe ways to hedge both Interest Rate Risk and FX risks.
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:
EUROCREDIT LOAN:A Swiss sporting goods company borrows in yen in the Eurocredit market at a rate of 4.94 percent from Bank of America using a three-month rollover loan. Bank of America assigns a default risk premium of 1.93 percent on the loan, and the country risk is an additional 0.76 percent. The bank can borrow funds in the Euromarket at the three-month LIBOR rate of 0.30 percent. What is Bank of America’s gross profit margin on this loan?
Assume the following information: U.S. investors have $1,000,000 to invest: 1-year deposit rate offered by U.S. banks = 10% 1-year deposit rate offered on Swiss francs = 13.5% 1-year forward rate of Swiss francs = $1.26 Spot rate of Swiss franc = $1.30 Does IRP hold? Is there an arbitrage opportunity?