Suppose that the term structure of risk-free interest rates is flat in the United States and Australia. The USD interest rate is 6.7% per annum and the AUD rate is 5.9% per annum. The current value of the AUD is 0.57 USD. Under the terms of a swap agreement, a financial institution pays 3.5% per annum in AUD and receives 6.2% per annum in USD. The principals in the two currencies are $12 million USD and 20 million AUD. Payments are exchanged every year, with one exchange having just taken place. The swap will last two more years. What is the USD value of the swap to the financial institution? Assume all interest rates are continuously compounded.

Suppose that the term structure of risk-free interest rates is flat in the United States and Australia. The USD interest rate is 6.7% per annum and the AUD rate is 5.9% per annum. The current value of the AUD is 0.57 USD. Under the terms of a swap agreement, a financial institution pays 3.5% per annum in AUD and receives 6.2% per annum in USD. The principals in the two currencies are $12 million USD and 20 million AUD. Payments are exchanged every year, with one exchange having just taken place. The swap will last two more years. What is the USD value of the swap to the financial institution? Assume all interest rates are continuously compounded.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter27: Multinational Financial Management

Section: Chapter Questions

Problem 7MC

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Suppose that the term structure of risk-free interest rates is flat in the United States and Australia. The USD interest rate is 5.9% per annum and the AUD rate is 5.7% per annum. The current value of the AUD is 0.57 USD. Under the terms of a swap agreement, a financial institution pays 2.0% per annum in AUD and receives 5.0% per annum in USD. The principals in the two currencies are $12 million USD and 20 million AUD. Payments are exchanged every year, with one exchange having just taken place. The swap will last two more years. What is the USD value of the swap to the financial institution? Assume all interest rates are continuously compounded. Enter your answer rounded to the nearest integer,
Suppose that the term structure of risk-free interest rates is flat in the United States and Australia. The USD interest rate is 7% per annum and the AUD rate is 9% per annum. The current value of the AUD is 0.62 USD. Under the terms of a swap agreement, a financial institution pays 8% per annum in AUD and receives 4% per annum in USD. The principals in the two currencies are $12 million USD and 20 million AUD. Payments are exchanged every year, with one exchange having just taken place. The swap will last two more years. What is the value of the swap to the financial institution? Assume all interest rates are continuously compounded.
The following information is the same for Questions 19 - 20. Currently, the spot exchange rate is USD/AUD = 0.85, and the one-year forward exchange rate is USD/AUD = 0.90. One-year risk-free interest rate is 5.5 % in Australia and 3.2% in the United States. You are the U.S. investor evaluating whether there is an opportunity for a covered interest rate arbitrage. You may borrow up to 1,000,000 USD or 1,176,470 AUD. Compute the risk-free arbitrage profit. 85,058 USD O45, 058 USD 38 USD 68,563 USD
(c) If the one-year interest rate on a dollar denominated Treasury bill is 4.5% p.a. and that on a similar Euro-denominated security is 7.5% p.a. and the current spot rate is USD 1.08/EUR, what forward exchange rate will prevent covered interest arbitrage?
Assume that 90-day U.S. securities have a 3.5% annualized interest rate, whereas90-day Canadian securities have a 4% annualized interest rate. In the spot market,1 U.S. dollar can be exchanged for 1.4 Canadian dollars. If interest rate parity holds,what is the 90-day forward exchange rate between U.S. and Canadian dollars?
Assume that the U.S. interest rate is 7 percent and the euro’s interest rate is 4 percent. Assume that the euro’s forward rate has a premium of 2 percent. a. What is the effective financing rate from financing with euros? Should a U.S. firm finance with euros?
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b) Assume that the one-year interest rate is 3% (per annum) in the UK and 2% (per annum) in the Euro area. Also, assume that the current spot exchange rate of one pound to the euro is €1.1500/£ and that the corresponding one-year forward rate is €1.1400/£. i) Provide calculations to show whether the Interest Rate Parity (IRP) theory holds. ii) A UK-based investor has £200,000 to invest for a year either in the Euro area or the UK. Using the above information, determine which investment will generate a higher return for them. iii) Discuss the extent to which your results in i) and ii) above provide support to the Covered Interest Rate Parity (CIRP) condition.
Suppose that the one-year interest rate is 5.0 percent in the United States and 3.5 percent in Germany, and that the spot exchange rate is $1.12/€ and the one-year forward exchange rate, is $1.16/€. Assume that al of these rates will be used and a speculator can borrow $1,000,000 or €1,000,000. This is an example whether Uncovered Interest Arbitrage is possible O This is an example of whether Purchasing Power Parity holds This is an example whether fisher effect holds O None of the above This is an example whether Covered Interest Arbitrage is possible
(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.
Assume that interest rate parity holds and that 90-day risk-free securities yield 3% in the United States and 3.3% in Germany. In the spot market, 1 euro equals $1.50. What is the 90-day forward rate?
Suppose that the annual interest rates on 6-months borrowing in Romania and the United States are 12.7 % and 0.8 %, respectively. The current spot rate RON/US$ is 4.00 and 6-months forward rate RON/US$ is 4.21. Does interest rate parity hold?