PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 27, Problem 14PS
Summary Introduction
To determine: The one transaction which can eliminate the exchange risk of importer.
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James Clark is a foreign exchange trader with Citibank. He notices the following quotes. (12’)Spot exchange rate SFr1.2051/$Six-month forward exchange rate SFr1.1922/$Six-month $ interest rate 2.5% per yearSix-month SFr interest rate 2.0% per yeara. Is the interest rate parity holding? You may ignore transaction costs.b. Is there an arbitrage opportunity? If yes, show what steps need to be taken to make arbitrage profit. Assuming that James Clark is authorized to work with $1,000,000, compute the arbitrage profit in dollars.?
Spot Exchange Rate is GBP 1.83155 = 1 OMR (For Immediate Delivery). Instead of buying GBP immediately you can enter into a contract with the bank to deliver the currency after 6 months. The bank has quoted 6 months forward rate as GBP1.83355 = 1 OMR. (Home Currency is OMR, which is given as Indirect quotes).
James Clark is a foreign exchange trader with Citibank. He notices the following quotes.
Spot exchange rate
Six-month forward exchange rate
Six-month $ interest rate
Six-month SFr interest rate
USD1.2051/SFr
USD1.1922/SFr
8% per year
10% per year
Is there an arbitrage opportunity? If yes, determine the arbitrage profit in Swiss Francs. Assume that James Clark is authorized to work with
$1,000,000. Input your answer without any currency information.
Chapter 27 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 27 - Exchange rates Look at Table 27.1. a. How many...Ch. 27 - Exchange rates Table 27.1 shows the 3-month...Ch. 27 - Prob. 3PSCh. 27 - Prob. 4PSCh. 27 - Prob. 5PSCh. 27 - Prob. 6PSCh. 27 - Prob. 8PSCh. 27 - Prob. 9PSCh. 27 - Prob. 10PSCh. 27 - Currency risk Companies may be affected by changes...
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- DO NOT USE AI TO COMPLETE An investor enters today into a one-year-long currency forward on 1000000 units of foreign currency. The current exchange rate is 1.05 dollars per Swiss franc. Interest rates in the US and Switzerland are 3% and 4% per annum, respectively, with continuous compounding. A. What should be the delivery price for this contract? B. Explain the transactions that will occur at maturity if the spot exchange rate at that moment is1.03 dollars per Swiss francarrow_forwardYou are a currency trader specializing in the Japanese yen, and you are confident that the spot exchange rate will be *118 per dollar in six months based on your analysis. The current spot exchange rate is 123 per dollar, and the six-month forward rate is 113 per dollar. Assume that you would like to buy or sell *100,004,000. Use direct quotes in your calculations. Enter the numeric portion of your answer without the currency symbols. Required: a-1. How should you speculate in the forward market to make a profit? a-2. What is the expected dollar profit from speculation? b. What would be your speculative profit in dollar terms if the spot exchange rate turns out to be ¥117 per dollar in six months? Complete this question by entering your answers in the tabs below. Req A1 Answer is complete but not entirely correct. Req A2 Req B What would be your speculative profit in dollar terms if the spot exchange rate turns out to be X117 per dollar in six months? Note: Round intermediate…arrow_forwardAnswer in typingarrow_forward
- Use the information below to answer the following questions. Canada dollar 6-months forward Japan Yen 6-months forward U.K. Pound 6-months forward Currency per U.S. $ 1.2375 1.2358 100.3100 100.0700 0.6794 0.6779 Suppose interest rate parity holds, and the current risk-free rate in the United States is 4 percent per six months. Requirement 1: What must the six-month risk-free rate be in Canada? [Select] [Select] Requirement 2: What must the six-month risk-free rate be in Japan? [Select] Requirement 3: What must the six-month risk-free rate be in Great Britain?arrow_forward(b) Jackton Company limited is a UK firm that has bought goods from a US Supplier and must pay US $4 million in three month time. The company finance director wishes to hedge against the foreign exchange risk and is considering 3 methods. Using forward exchange contract Using the money market hedge Using lead payment The annual interest rate and exchange rates are given below; US S UK £ Deposit Rate 1 month 7% Borrowing rate 10.25% Deposit Borrowing 10.75% 3 month 7% 10.75% 4% 14% 4.25% Spot rate £:1 : $ 1.8625 1.8635 1 month forward 0.6-0.58 cents premium 3 months forward 1.80 1.75 cent premium Advice the company on the best method to use. (Show all your workings) [12 marks]arrow_forwardA UK company owes an American company $100,000 due to be paid in three months. The company wishes to avoid exchange rate risk, so borrows enough in sterling now and converts it immediately to dollars which are invested to bring in the required amount in three months' time. The following information is available: Spot rate $/£ 1.7755 - 1.7765 3-month interest rates: Sterling 3.250% US dollar 2.425% How much will the UK company have to borrow now to clear the debt in three months? A. £54,958 B. £54,989 £56,744 D. £56,775 C.arrow_forward
- Cheng has a 80,000 foreign currency receivable due in 60 days. What is the appropriate action for Cheng to take today if it wishes to hedge its foreign exchange exposure. a. Enter into a FX spot contract today, purchasing foreign currency and selling US dollars b. Sell an FX option today to a Bank, giving the Bank the right but not the obligation to sell to Roberts 50,000 foreign currency and buy US dollars in 60 days. c. Enter into an FX forward today buying foreign currency and selling US dollars for settlement in 60 days d. Enter into an FX forward today buying US dollars and selling foreign currency for settlement in 60 days. e. Buy an FX option today giving Roberts the right but not the obligation to buy 50,000 foreign currency and sell US dollars in 60 daysarrow_forwardUse the information below to answer the following questions. Currency per U.S. $ 1.2380 1.2353 Australia dollar 6-months forward Japan Yen 6-months forward U.K. Pound 6-months forward 100.3600 100.0200 .6789 .6784 Suppose interest rate parity holds, and the current six month risk-free rate in the United States is 5 percent. Use the approximate interest rate parity equation to answer the following questions. a. What must the six-month risk-free rate be in Australia? (Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What must the six-month risk-free rate be in Japan? (Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Australian risk-free rate b. Japanese risk-free rate c. Great Britain risk-free rate c. What must the six-month risk-free rate be in Great Britain? (Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) % % %arrow_forwardAn Omani importer will receive commodities from USA and he has to pay an amount of USD 250,000 next month. Which of the below markets is well suited to offer hedging protection against this transactions risk exposure? a. Inflation rate market O b. Transactions market C. Spot market O d. Forward marketarrow_forward
- 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 $25,140,000.00 after 30-days (principal plus interest) due to their Thus, Denver's speculative profit is 7.20% 6.96% (U.S. dollars).arrow_forwardSuppose that Denver Financial Co. expects the exchange rate of the New Zealand dollar (NZ$) 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).arrow_forwardYou observe the following current rates: Spot exchange rate: $0.01/yen. Annual interest rate on 90-day U.S. dollar–denominated bonds: 4%. Annual interest rate on 90-day yen-denominated bonds: 4%. a. If uncovered interest parity holds, what spot exchange rate do investors expect to exist in 90 days? b. A close U.S. presidential election has just been decided. The candidate whom international investors view as the stronger and more probusiness person won. Because of this, investors expect the exchange rate to be $0.0095/yen in 90 days. What will happen in the foreign exchange market?arrow_forward
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