Mr. Alex, a British arbitrageur, has the following data. The one-year interest rate offered in the UK is 8%, while the one-year interest rate offered in Australia is 5%. The spot rate is £0.3000/AUD. Mr.Alex is offered a one-year forward contract at £0.312/AUD. He also being offered £120,000 or AUD250,000 credit facility. If Interest Rate Parity (IRP) is not holding, determine how would Mr.Alex carry out covered interest arbitrage (CIA) and compute the profit.

Mr. Alex, a British arbitrageur, has the following data. The one-year interest rate offered in the UK is 8%, while the one-year interest rate offered in Australia is 5%. The spot rate is £0.3000/AUD. Mr.Alex is offered a one-year forward contract at £0.312/AUD. He also being offered £120,000 or AUD250,000 credit facility. If Interest Rate Parity (IRP) is not holding, determine how would Mr.Alex carry out covered interest arbitrage (CIA) and compute the 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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Suppose that Baltimore Machinery sold a drilling machine to a Swiss firm and gave the Swiss client a choice of paying either $11,000 or SF16,500 in three months. Required: Baltimore Machinery effectively gave the Swiss client a free option to buy up to $11,000 using Swiss francs. What is the "implied" exercise exchange rate? Note: Round your answer to 4 decimal places. Implied exercise rate
ATZ (US Company) expects to receive a 19 million euros in 90 days from a Australia customer. The current spot rate is S$1.836 per AUD, and the 90 day forward rate is S$1.638 per AUD. In addition, the annualized three-month AUD and USD interest rate 2.81% and 4.03%, respectively. What is the hedged value of the AUD receivable using the forward contract? How does that compare to a situation when the exchange rate remains unchanged at the spot rate?
Subject:- finance
. Peder Mueller is a foreign exchange trader for a bank in New York. He has $1 million (or its Swiss franc equivalent) to invest for three months. Using the following values and assumptions, Spot exchange rate (CHF-USD1.00) 3-month forward rate (CHF-USD1.00) Expected spot rate in 3 months (CHF=USD1.00) U.S. dollar 3-month interest rate (%) Swiss franc 3-month interest rate (%) 1.2810 1.2740 1.2700 4.800 3.200 He decides not cover his forward dollar receipts-an uncovered interest arbitrage (UIA) transaction. How much profit can he make if his assumptions are true? $4,731 b. $1,538 c. $7,061 d. $12,765
Mark an American has $6 million that he intends to invest in Kenya. The macroeciomic variables of the two countries were: Interest rates: Kenyan Interest Rates -7% / USA Interest Rates- 5% Inflation rates: Kenyan Inflation rates - 6% / USA Inlfation Rates- 3% Gross Domestic Product - Kenya - 9% / USA - 5% The spot rate was ksh 114/$. The estimated period for the investment by Mark was one year. Mark entered into a forward contract to insulate the dollar.at ksh 115/$. Required: (a) Compute the covered interest arbitrage (b) State and explain the factors that influence covered interest arbitrage
Toll Brothers Inc. builds and finances luxury homes in the U.S.. Toll Bros. offers a 29 year mortgage where the borrower makes no payments during the first year. The promotion is offered on its entry level design, The Refuge, which sells for $1000000. What are the monthly payments after the first year? Toll Bros. offers an annual interest rate of 3.5%. Assume that this offer is in the U.S. where banks charge a periodic interest rate of i/m. Round your answer to the nearest dollar. Your Answer: Answer
The firm you work for is Multinational Widget Inc. You are involved in a fixed-for-fixed currency swap between ¥ and $US. The swap has 5 years left to maturity and a principal of $1 million US or ¥100 million. In the swap, you make annual payments of $80,000 to the bank (and also pay the principal at maturity) and you receive annual payments of ¥10,000,000 per year (and also receive the principal at maturity). Assume that when this swap was set up, it was "at market", meaning that the net value to you was zero. If the current spot rate is 90 ¥/$US, the current interest rate for ¥ is 12% and the current interest rate for $US is 10%, what is the value of your swap position? $4,035.50 US $5,565.250 US $80,345.50 US $90,67.50 US None of these
You sold goods for USD 2 million and expected to receive the proceeds in 2 months. You entered into a forward exchange contract (“FEC”) at AUD/USD 0.9600. You have been advised your customer cannot pay the USD 2m until 3 months after the FEC date. Your bank agrees that you can extend your FEC at the historical rate. Current spot rate is AUD/USD 0.8800 with USD and AUD interest rates 1% pa and 6% pa respectively. What is the approximate amount of AUD you will now receive at the revised future date: Select one: A. AUD 2,301,000 B. AUD 2,083,000 C. AUD 2,273,000 D. AUD 2,109,000
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Suppose that you are a finance manager at a U.S. based MNC. On January 1st, you anticipate you will need to purchase C$170,000.00 (Canadian dollars) worth of supplies from a Canadian supplier in March using Canadian dollars (C$). The current spot rate for the Canadian dollar is $0.73. In order to lock in spot rate for this exchange, you purchase a futures contract specifying C$170,000.00 at $0.73 per Canadian dollar with a March 10th settlement date. On the settlement date, your MNC will need to pay (U.S. dollars) for the C$170,000.00.
H1.
Your grandparents would like to establish a trust fund that would pay annual payments to you and your heirs of $250,000 a year forever. How much do your parents need to deposit into this trust fund today to achieve their goal if the fund can earn 10% interest?

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