In alternative universe, the Australian government has decided to enter into a target-zone arrangement with the United States. Australian firm K-Roo has a USD 150,000 payable due in 180 days. Assuming the current exchange rate is AUD1.44/USD, the central rate for the USD/AUD is set at 0.5 USD per AUD, and the currencies are allowed to fluctuate with a 10% band on either side, what is the maximum possible amount (in terms of AUD) that K-Roo could lose due to changes in the future exchange rate? Select one: a. 114000.00 b. 101416.67 c. 133500.00 d. 21600.00 e. -54000.00

In alternative universe, the Australian government has decided to enter into a target-zone arrangement with the United States. Australian firm K-Roo has a USD 150,000 payable due in 180 days. Assuming the current exchange rate is AUD1.44/USD, the central rate for the USD/AUD is set at 0.5 USD per AUD, and the currencies are allowed to fluctuate with a 10% band on either side, what is the maximum possible amount (in terms of AUD) that K-Roo could lose due to changes in the future exchange rate? Select one: a. 114000.00 b. 101416.67 c. 133500.00 d. 21600.00 e. -54000.00

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter20: Short-term Financing

Section: Chapter Questions

Problem 4ST

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In alternative universe, the Australian government has decided to enter into a target-zone arrangement with the United States. Australian firm Cockatoo has a USD 180,000 payable due in 180 days. Assuming the current exchange rate is AUD1.5/USD, the central rate for the AUD/USD is set at 1.55 AUD per USD, and the currencies are allowed to fluctuate with a 11% band on either side, what is the maximum possible amount (in terms of AUD) that Cockatoo could lose due to changes in the future exchange rate? O a. 141096.77 b. 29700.00 O c. 39690.00 d. 33075.00 O e. 30690.00
Currently, the spot exchange rate is $1.59 per £ and the three-month forward exchange rate is $1.61 per £. The three-month interest rate is 8.0% per annum in the U.S. and 5.8% per annum in the U.K. Assume that you can borrow as much as $1,590,000 or £1,000,000. Required: Determine whether the interest rate parity is currently holding. If the IRP is not holding, how would you carry out covered interest arbitrage? What will be your arbitrage profit? Explain how the IRP will be restored as a result of covered arbitrage activities.
Blur Ltd, a UK importer, expects to make a payment of 1.8m Australian dollars (A$) for sure in one year from now. Blur will need to pay for the A$ currency in sterling (£). Assume that the Australian dollar’s spot exchange rate now is A$=£0.56, the one-year forward rate is A$=£0.59, and the discount rate is zero. Blur may need to pay an additional A$3.1m one year from now if it agrees a deal with a new Australian supplier, also payable in one year from now. The probability of this deal being agreed is 0.5. If the deal is not agreed (probability 0.5), Blur makes no payment to the new supplier. Suppose for parts (a) and (b) that the spot rate in one year is A$=£0.58. Assume Blur chooses to enter into a forward exchange contract for the maximum possible payment of A$4.9m. What actions will the firm take and what will be the value of its net payments in £, if in one year: the new deal is agreed? the new deal is not agreed? What will be the expected value of Blur’s net payment in…
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A New Zealand company will receive a payment in USD in one year. It wants to hedge its exchange rate risk exposure. It will do this by entering into a currency forward contract to buy NZD in exchange for USD in one year. Use this information to help answer the questions that follow. (a) The current spot exchange rate for the New Zealand dollar per US dollar (NZD/USD) is 1.5836. The one-year risk-free rates are 2.0% for the New Zealand dollar and 3.5% for the US dollar. According to CIP, the no-arbitrage one-year NZD/USD forward exchange rate is closet to: Select alternative ✓ (b) Suppose that the company decides to wait a few more weeks before hedging. It then enters into a currency forward contract to buy NZD in exchange for USD at a rate of 1.5502 NZD per USD. A year later, when the company receives the USD payment, the spot NZD/USD exchange rate is 1.6123. In this case, the company would have been Select alternative if it had not hedged.
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Currently, the spot exchange rate is $1.67 per £ and the three-month forward exchange rate is $1.69 per £. The three-month interest rate is 8.0% per annum in the U.S. and 5.8% per annum in the U.K. Assume that you can borrow as much as $1,670,000 or £1,000,000. Required: a. Determine whether the interest rate parity is currently holding. b. If the IRP is not holding, how would you carry out covered interest arbitrage? What will be your arbitrage profit? c. Explain how the IRP will be restored as a result of covered arbitrage activities. Complete this question by entering your answers in the tabs below. Required A Required B Required C Determine whether the interest rate parity is currently holding. Determine whether the interest rate parity is currently holding.
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Currently, the spot exchange rate is $1.51 per £ and the three-month forward exchange rate is $1.53 per £. The three-month interest rate is 8.0% per annum in the U.S. and 5.8% per annum in the U.K. Assume that you can borrow as much as $1,510,000 or £1,000,000. Required: a. Determine whether the interest rate parity is currently holding. b. If the IRP is not holding, how would you carry out covered interest arbitrage? What will be your arbitrage profit? c. Explain how the IRP will be restored as a result of covered arbitrage activities. Complete this question by entering your answers in the tabs below. Required A Required B Required C If the IRP is not holding, how would you carry out covered interest arbitrage? What will be your arbitrage profit? Note: Do not round intermediate calculations. Interest arbitrage Arbitrage profit Borrow in the U.S. and invest in the U.K. Hedge exchange rate risk by selling British pounds forward. < Required A Required C
Currently, the spot exchange rate is CHF 0.89/$ and the three-month forward exchange rate is CHF 0.86/$. The three-month interest rate is 5.6% per annum in the U.S. and 4.0% per annum in Switzerland. Assume that you can borrow as much as $1,120,000 or CHF 1,000,000. Determine whether the interest rate parity is currently holding. If the IRP is not holding, how would you carry out covered interest arbitrage? Show all the steps and determine the arbitrage profit. Explain how the IRP will be restored as a result of covered arbitrage activities.
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The spot rate of foreign exchange between Canada and the United Kingdom is CAD$1.75/£. If the interest rate in Canada is 11 per cent and it is 6 per cent in the United Kingdom, what would you expect the one-year forward rate to be if no immediate arbitrage opportunities existed?