Q17. October 20, 2020, Corporation D entered a contract to receive two million Argentine pesos on January 20, 2021, for $100,000 based on a $1 per exchange rate futures contract (three months). 20 Argentine pesos. (Why would D Corporation get this contract? A) Corporation D believes that the value of the Argentine peso will increase at the same rate as the dollar B) Corporation D believes that Argentine's economy will grow at a lower rate than that of the United States. C) You could be protecting yourself from a future need to make a payment in Mexican pesos D) Corporation D believes that the value of the Argentine peso will decrease relative to the dollar

Q17. October 20, 2020, Corporation D entered a contract to receive two million Argentine pesos on January 20, 2021, for $100,000 based on a $1 per exchange rate futures contract (three months). 20 Argentine pesos. (Why would D Corporation get this contract? A) Corporation D believes that the value of the Argentine peso will increase at the same rate as the dollar B) Corporation D believes that Argentine's economy will grow at a lower rate than that of the United States. C) You could be protecting yourself from a future need to make a payment in Mexican pesos D) Corporation D believes that the value of the Argentine peso will decrease relative to the dollar

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter7: International Arbitrage And Interest Rate Parity

Section: Chapter Questions

Problem 49QA

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3. Suppose that the treasurer of IBM can borrow $100,000,000 or its gbp equivalent, and observes the following quotes: the 120-days interest rate is 8 percent per annum in the United States and 6 percent per annum in United Kingdom. Currently, the spot exchange rate is $1.20 per gbp and the 120-days forward exchange rate is $1.30 per gbp. Treasurer calculates possible future Spot exchange rate (in 120 days) considering PPP with expected inflation rates of 4 percent per annum in the United States and 2 percent per annum in United Kingdom. Calculate (if exists) Covered Interest Arbitrage and Uncovered Interest Arbitrage. Explain differences between CIA and UIA.
2. Suppose today's exchange rate is $1.23/€. The three-month interest rates on dollars and euros are 6% and 3 % (both anual rates), respectively. The three-month forward rate is $1.25. A foreign exchange advisory service has predicted that the euro will appreciate to $1.27 within three months. Consider 1 million euros. a.. How would you use forward contracts to speculate in the above situation? b. How would you use money market instruments (borrowing and lending) to speculate? C. Which alternatives (forward contracts or money market instruments) would you prefer? Why? d. Can you make profits without risks? If so, explain and calculate how you do that.
Example 9-1: Suppose that on March 13, 2020, a U.S. firm plans to purchase 3 million Swiss francs' (Sf) worth of Swiss bonds from a Swiss FI in one month's time. The Swiss FI wants payment in Swiss francs. Believing that the exchange rate of U.S. dollars for Swiss francs will move against it in the next month, the U.S. firm will convert dollars into Swiss francs today. The spot exchange rate for March 13, 2020 (reported in Table 9-1), of U.S. dollars for Swiss francs (or CHF/USD) is 1.0521, or one franc costs 1.0521 in dollars. Consequently, the U.S. firm must convert: One month after the conversion of dollars to Swiss francs, the Swiss bond purchase deal falls through and the U.S. firm no longer needs the Swiss francs it purchased at $1.0521 per franc. The spot exchange rate of the Swiss franc to the dollar has fallen or depreciated over the month so that the value of a franc is worth only $1.0375, or the exchange • What is the initial amount needed in $ for the 3 million francs? •…
You observe the following quoted money market rates: Spot exchange rate 95-day Forward exchange rate 95-day USD interest rate 95-day AUD interest rate What will your profit (in USD) be 95 days from now if you borrow USD3 million today and invest in Australia and then convert back to USD? In your calculations assume 360 days per year. a. -USD 361,605.85 b. -USD 352,934.10 -USD 272,802.68 Bid Ask AUD1.185/USD AUD1.189/USD AUD1.341/USD AUD1.349/USD 5.57% p.a. 6.38% p.a. 7.71% p.a. 8.81% p.a. O c. O d. -USD322,300.31 O e. None of the options in this question.
16. Assume that the export price of a Toyota Corolla from Osaka, Japan is ¥2,150,000. The exchange rate is ¥294/OMR. The forecast rate of inflation in the Oman is 2.2% per year and is 0.0% per year in Japan. Use this data to answer the following questions on exchange rate pass–through. a. What was the export price for the Corolla at the beginning of the year expressed in Omani Rials? b. Assuming purchasing power parity holds, what should the exchange rate be at the end of the year? c. Assuming 100% pass–through of exchange rate, what will be the dollar price of a Corolla at the end of the year?
Assume that a bank has assets located in Germany worth €150 million earning an average of 8 percent. It also holds €100 in liabilities and pays an average of 6 percent per year. The current spot rate is €1.50 for $1. If the exchange rate at the end of the year is €2.00 for $1, ( LG 19-1) a. What happened to the dollar? Did it appreciate or depreciate against the euro (€)? b. What is the effect of the exchange rate change on the net interest margin (interest received minus interest paid) in dollars from its foreign assets and liabilities? c. What is the effect of the exchange rate change on the value of the assets and liabilities in dollars?
Currently, the USD/MXN rate is 19.7800 and the six-month forward exchange rate is 20.1700. The six-month interest rate is 4.9% per annum in the U.S. and 6.2% per annum in Mexico. Assume that you can borrow MXP10,000,000 or its equivalent in USD. How much do you make/lose if you borrow the foreign currency and invest locally? (USD, no cents)
Suppose that Denver Financial Co. expects the exchange rate of the New Zealand dollar (NZ$) 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).
Q3. Bank USA recently purchase $10million worth of euro denominated one-year CDs that pay 10% interest annually. The current spot rate of U.S. dollars for euros is $1.30/€1. Is Bank USA exposed to an appreciation or depreciation of the dollar relative to the euro? What will be the return on the one-year CD if the dollars appreciates relative to the euro such that the spot rate of U.S. dollars for euros at the end of the year is $1.2/€1? What will be the return on the one-year CD if the dollars depreciates relative to the euro such that the spot rate of U.S. dollars for euro at the end of the year is $1.4/€1?
9. Cray Research sold a super computer to the Max Planck Institute in Germany on credit and invoiced €10 million payable in six months. Currently, the six-month forward exchange rate is $1.10/€ and the foreign exchange advisor for Cray Research predicts that the spot rate is likely to be $1.05/€ in six months. (a) What is the expected gain/loss from the forward hedging? (b) If you were the financial manager of Cray Research, would you recommend hedging this euro receivable? Why or why not? (c) Suppose the foreign exchange advisor predicts that the future spot rate will be the same as the forward exchange rate quoted today. Would you recommend hedging in this case? Why or why not? (d) Suppose now that the future spot exchange rate is forecast to be $1.17/€. Would you recommend hedging? Why or why not?
Suppose that the U.S. firm Halliburton buys construction equipment from the Japanese firm Komatsu at a price of ¥250 million The equipment is to be delivered to the United States and paid for in one year. The current exchange rate is ¥96 = $1. The current interest rate on one-year U.S. Treasury bills is 6%, and on one-year Japanese government bonds the interest rate is 4%. a. If Halliburton exchanges dollars for yen today and invests the yen in Japan for one year, it will need to exchange today in order to have ¥250 million in one year. (Round your response to the nearest dollar)