Suppose that California Co., a U.S. based MNC, seeks to capitalize a difference in interest rates between euros and British pounds via the use of acarry trade. In particular, after 1 month, funds invested in euros will yield a 0.50% percent return, while funds invested in pounds will yield a return of2.00% percent.Currently the spot rate of the British pound is $1.00 while the spot rate of the euro is $0.80. In other words, the pound is worth 1.25 euros. CaliforniaCo. expects these spot rates to remain constant over the next month.After 1 month, California Co. now has 693,600 pounds after investing their converted pounds. However, it is now time for California Co. to repay the600,000 euro loan.If California Co. borrowed these euros at the prevailing rate of 0.50% percent, they must repay a total ofrate of 1.25, this repayment is equivalent topounds.euros. At the crosspounds. Thus, after repaying the loan, California Co. will have

Final Answer: If California Co. borrowed these euros at the prevailing rate of 0.50% percent, they…

Answered: Suppose that California Co., a U.S.…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter22: International Financial Management

Section: Chapter Questions

Problem 1P

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Suppose that California Co., a U.S. based MNC, seeks to capitalize a difference in interest rates between euros and British pounds via the use of a carry trade. In particular, after 1 month, funds invested in euros will yield a 0.50% percent return, while funds invested in pounds will yield a return of 2.00% percent. Currently the spot rate of the British pound is $1.00 while the spot rate of the euro is $0.80. In other words, the pound is worth 1.25 euros. California Co. expects these spot rates to remain constant over the next month. After repaying their euro loan, California Co. has 211,200 pounds remaining. Assume that the exchange rate is still $1.00 per pound. These pounds are equivalent to $ , which represents a profit of $ over the initial $200,000 that California Co. used from their own funds.
Suppose that California Co., a U.S. based MNC, seeks to capitalize a difference in interest rates between euros and British pounds via the use of a carry trade. In particular, after 1 month, funds invested in euros will yield a 0.50% percent return, while funds invested in pounds will yield a return of 2.00% percent. Currently the spot rate of the British pound is $1.00 while the spot rate of the euro is $0.80. In other words, the pound is worth 1.25 euros. California Co. expects these spot rates to remain constant over the next month. If California Co. takes $200,000 of its own funds and converts them to pounds it would have 600,000 euros and converts them to pounds, it will have pounds. pounds. If California Co. borrows
Suppose that the current EUR/GBP rate is 0.6674 and the one-year forward exchange rate is 0.6748. The one-year interest rate is 1.4% in euros and 3.4% in pounds. You can borrow at most €1,000,000 or the equivalent pound amount. Suppose you are a Euro-based investor. Determine the profit/loss (in EUR, no cents) if you borrow locally and invest in pounds
Suppose that the current EUR/GBP rate is 0.6668 and the one-year forward exchange rate is 0.6742. The one-year interest rate is 1.8% in euros and 3.6% in pounds. You can borrow at most €1,000,000 or the equivalent pound amount. Suppose you are a pound-based investor. Determine the profit/loss (in GBP, no cents) if you borrow locally and invest in Euros.
Suppose that Denver Financial Co. expects the exchange rate of the New Zealand dollar (NZ$) to depreciate from its current level of 0.5 to 0.45 in 30 days. Denver Financial seeks to capitalize on this potential opportunity. Suppose that Denver Financial begins by borrowing NZ$50,000,000 and converting it to U.S. dollars. The following table shows the short-term interest rates (annualized) in the interbank market. Currency Lending Rate Borrowing rate (Adjusted for 30-day period) (Adjusted for 30-day period) U.S. Dollars 6.72% 7.20% New Zealand Dollars (NZ$) 6.48% 6.96% After exchanging $50,000,000 to dollars, Denver Financial will have
Newstar Co. expects to pay 500,000 euro in one year. Assume the annual interest rate of borrowing or lending euro is 1% and the annual interest rate of borrowing or lending U.S. dollar is 2%. The spot rate of euro is $1.12 per euro. How much guaranteed amount of U.S. dollar does the company expect to pay after hedging the euro payable transaction in the international money market? (pick the closest answer) A. 565,545 USD. B. 554,510 USD. C. 562,786 USD. D. 576,912 USD.
Suppose that Denver Financial Co. expects the exchange rate of the New Zealand dollar (NZ$) to depreciate from its current level of 0.5 to 0.45 in 30 days. Denver Financial seeks to capitalize on this potential opportunity. Suppose that Denver Financial begins by borrowing NZ$50,000,000 and converting it to U.S. dollars. The following table shows the short-term interest rates (annualized) in the interbank market. Currency U.S. Dollars New Zealand Dollars (NZ$) investment. Lending Rate Borrowing rate (Adjusted for 30-day period) (Adjusted for 30-day period) 6.72% 6.48% In the previous stages of this problem, you found that Denver Financial initially borrowed funds and must repay the equivalent of $22,630,500.00 after 30-days. However, using those funds, Denver Financial was able to secure $25,140,000.00 after 30-days (principal plus interest) due to their Thus, Denver's speculative profit is 7.20% 6.96% (U.S. dollars).
Suppose that Denver Financial Co. expects the exchange rate of the New Zealand dollar (NZ$) to depreciate from its current level of 0.5 to 0.45 in 30 days. Denver Financial seeks to capitalize on this potential opportunity. Suppose that Denver Financial begins by borrowing NZ$50,000,000 and converting it to U.S. dollars. The following table shows the short-term interest rates (annualized) in the interbank market. Currency U.S. Dollars New Zealand Dollars (NZ$) investment. Lending Rate Borrowing rate (Adjusted for 30-day period) (Adjusted for 30-day period) 6.72% 6.48% In the previous stages of this problem, you found that Denver Financial initially borrowed funds and must repay the equivalent of $22,630,500.00 after 30-days. However, using those funds, Denver Financial was able to secure $25,140,000.00 after 30-days (principal plus interest) due to their Thus, Denver's speculative profit is 7.20% 6.96% (U.S. dollars).
(b)Suppose that the annual interest rate is 5% in the U.S and 8% in the UK and that the spot exchange rate is $1.80 to the UK pound sterling. Consider that the forward exchange rate , with one -year maturity, is $1.78 to the pound sterling. If an arbitrager has the capacity to borrow either $1,000,000 or the pound sterling equivalent at the current spot foreign exchange rate, (b1)Evaluate the feasibility of covered interest arbitrage for this investor. (b2)Determine the profit that the investor could earn upon conclusion of the investment process. (b3)Briefly discuss the realignment process that would close the opportunities for further arbitrage.
Bank USA recently purchased $10 million worth of euro-denominated one-year CDs that pay 10 percent interest annually. The current spot rate of U.S. dollars for euros is $1.104/€1. a. Is Bank USA exposed to an appreciation or depreciation of the dollar relative to the euro? b. What will be the return on the one-year CD if the dollar appreciates relative to the euro such that the spot rate of U.S. dollars for euros at the end of the year is $1.004/€1? (Do not round intermediate calculations. Round your answer to 3 decimal places. (e.g., 32.161)) c. What will be the return on the one-year CD if the dollar depreciates relative to the euro such that the spot rate of U.S. dollars for euros at the end of the year is $1.204/€1? (Do not round intermediate calculations. Round your answer to 3 decimal places. (e.g., 32.161)) a. Exposure b. Return if dollar appreciates C. Return if dollar depreciates Appreciation 10.440 % 32.440 %
Suppose that the current spot exchange rate is €0.830/S and the three-month forward exchange rate is €o.815/S. The three-month interest rate is 6.00 percent per annum in the United States and 5.40 percent per annum in France. Assume that you can borrow up to $1,000,000 or €830,000. Show how to realize a certain profit via covered interest arbitrage, assuming that you want to realize profit in terms of U.S. dollars. Also determine the size of your arbitrage profit.
a) Assume the following information: 180‑day U.S. interest rate = 8% 180‑day British interest rate = 9% 180‑day forward rate of British pound = $1.50 Spot rate of British pound = $1.48 Assume that a U.S. exporter will receive 400,000 pounds in 180 days. Would it be better off using a forward hedge or a money market hedge? Substantiate your answer with estimated revenue for each type of hedge. b) As treasurer of a U.S. exporter to Canada, you must decide how to hedge (if at all) future receivables of 250,000 Canadian dollars 90 days from now. Put options are available for a premium of $.03 per unit and an exercise price of $.80 per Canadian dollar (CA$). The forecasted spot rate of the CA$ in 90 days follows: Future Spot Rate Probability (%) $.75 50…

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