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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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 $90,67.50 US None of these
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You are US company, 500,000 BP (British Pound) payable to UK in one year. Answer in terms of US$. Information for Forward Contract: Forward exchange rate (one yr): 1.54 $/BP Information for Money Market Instruments (MMI): Current exchange rate: 1.50 $/BP Investment return at Aerion Fund Management (in UK): 4% annual Interest rate of borrowing from Bank of America (in USA): 2% annual Information you need for Currency Options Contract: Options premium: 0.015 $/BP Interest rate of borrowing from Bank of America (USA): 2% annual Allowed to exercise options at 1.54 $/BP What are the costs of MMI? (Answer in US$ of course. You are US company!) Group of answer choices None of the above $789,343 $735,504 $770,082 $783,452
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$170,000.00.
H1.
You are US company, 500,000 BP (British Pound) payable to UK in one year. Answer in terms of US$. Information for Forward Contract: Forward exchange rate (one yr): 1.54 $/BP Information for Money Market Instruments (MMI): Current exchange rate: 1.50 $/BP Investment return at Aerion Fund Management (in UK): 6% annual Interest rate of borrowing from Bank of America (in USA): 2% annual Information you need for Currency Options Contract: Options premium: 0.015 $/BP Interest rate of borrowing from Bank of America (USA): 2% annual Allowed to exercise options at 1.54 $/BP What are the costs of MMI? (Answer in US$ of course. You are US company!)
The current spot rate is $0.80/A$ and the six-month forward rate is $0.7775/A$. One-year interest is 8% in the United States and 9% in Australia. An investor can borrow up to $ 500,000 or A$625,000, the dollar equivalent at the spot rate. a) Determine if IRP is holding between Australia (A$) and USA ($) b) If IRP does not exist, explain briefly how an investor would realize certain arbitrage profit in U.S. dollar terms. c) Explain (briefly) how IRP will be restored as a result of the arbitrage transactions investors carry out above. (Hint to answer : As more investors buy _____(A$ or $) at spot price, _____(A$ or $) will appreciate and hence, the spot price $0.80/A$ will increase so that the interest rate parity is restored.)
You are the managing Director of Sunkwa limited a food processing company based in Atlanta in the United States of America. You are planning to visit Geneva, Switzerland in three months’ time to attend an international business conference. You expect to incur the total cost of SF 5,000 for lodging, meals and transportation during your stay. As of today, the spot exchange rate is $0.60/SF and the three-month forward rate is $0.63/SF. You can buy the three-month call option on SF with the exercise rate of $0.64/SF for the premium of $0.05 per SF. Assume that your expected future spot exchange rate is the same as the forward rate. The three-month interest rate is 6 percent per annum in the United States and 4 percent per annum in Switzerland. REQUIRED;(i) Calculate your expected dollar cost of buying SF5, 000 if you choose to hedge via call option on SF.

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