The pound spot rate is $1.40/ and the pound interest rate is 2%. The dollar and...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
The pound spot rate is $1.40/ and the pound interest rate is 2%. The dollar and U.K. inflation rates are both 0% per annum. If a derivative (not a forward) contract that pays 1 in 1 year is currently traded at $1.40, can you make a riskless profit? (Yes/No) If so, compute the profit (a positive number). If not, compute the loss (a negative number) or enter 0. The profit or loss should be made in pounds in 1 year. All contracts are divisible and can be sold short. There is no restriction on borrowing or lending. Ignore irrelevant information. "Yes"/"No" pounds in 1 year b) A regression of the percentage change in the Mexican peso (MXN) spot rate on the percentage change in the peso futures price gives the following estimate: As, S/MXN = a + B Afut S/MXN + & where a and as well as the spot rate and the six-month futures price are given below. The contract size of the peso futures is MXN500,000. How many futures contracts should an importer of Mexican tequila buy or sell to hedge its MXN 2 million obligation payable in four months? Is there any mismatch in your hedge? Choose one of the followings: 1. volatility, 2. interest, 3. liquidity, 4. spot, 5. forward, 6. currency, 7. size, 8. inflation, 9. volume, 10. maturity. a Spot rate: "Buy"/"Sell": B Futures price: Number of contracts: Mismatch: Enter only the number as a numeric value, e.g., 0:| Profit/loss/0 0.02 17.64 MXN/$ 0.98 18 MXN/$ The pound spot rate is $1.40/ and the pound interest rate is 2%. The dollar and U.K. inflation rates are both 0% per annum. If a derivative (not a forward) contract that pays 1 in 1 year is currently traded at $1.40, can you make a riskless profit? (Yes/No) If so, compute the profit (a positive number). If not, compute the loss (a negative number) or enter 0. The profit or loss should be made in pounds in 1 year. All contracts are divisible and can be sold short. There is no restriction on borrowing or lending. Ignore irrelevant information. "Yes"/"No" pounds in 1 year b) A regression of the percentage change in the Mexican peso (MXN) spot rate on the percentage change in the peso futures price gives the following estimate: As, S/MXN = a + B Afut S/MXN + & where a and as well as the spot rate and the six-month futures price are given below. The contract size of the peso futures is MXN500,000. How many futures contracts should an importer of Mexican tequila buy or sell to hedge its MXN 2 million obligation payable in four months? Is there any mismatch in your hedge? Choose one of the followings: 1. volatility, 2. interest, 3. liquidity, 4. spot, 5. forward, 6. currency, 7. size, 8. inflation, 9. volume, 10. maturity. a Spot rate: "Buy"/"Sell": B Futures price: Number of contracts: Mismatch: Enter only the number as a numeric value, e.g., 0:| Profit/loss/0 0.02 17.64 MXN/$ 0.98 18 MXN/$
Expert Answer:
Answer rating: 100% (QA)
a No you cannot make a riskless profit in this scenario The current spot rate for the pound is 140 a... View the full answer
Related Book For
Posted Date:
Students also viewed these finance questions
-
KYC's stock price can go up by 15 percent every year, or down by 10 percent. Both outcomes are equally likely. The risk free rate is 5 percent, and the current stock price of KYC is 100. (a) Price a...
-
The following additional information is available for the Dr. Ivan and Irene Incisor family from Chapters 1-5. Ivan's grandfather died and left a portfolio of municipal bonds. In 2012, they pay Ivan...
-
Read the case study "Southwest Airlines," found in Part 2 of your textbook. Review the "Guide to Case Analysis" found on pp. CA1 - CA11 of your textbook. (This guide follows the last case in the...
-
A stock has a beta of 1.55 and an expected return of 15 percent. A risk-free asset currently earns 2.2 percent. a. What is the expected return on a portfolio that is equally invested in the two...
-
What is the best way to answer the question, Tell me about yourself?
-
In the accounting department of the same company, an accountant completes 500 accounting entries per day. The probability of making a mistake is 0.004. What is the probability that the accountant...
-
A randomly oriented, short-fiber-reinforced composite plate having a central through-thickness crack of length \(2 a\) is subjected to a uniaxial stress \(\sigma\), as shown in Figure 9.1. If the...
-
What is Las Vegas selling? What are visitors really buying? Discuss these questions in terms of the core benefit, actual product, and augmented product levels. When you hear someone mention Las...
-
. What is a non-political socially-appropriate response to someone who is exhibiting prejudice? What are the responsibilities of a social psychology researcher when the researcher encounters...
-
Spencer Duck (SSN 000-22-1111) is single and his eight-year-old son, Mitch, lives with him nine months of the year in a rented condominium at 321 Hickory Drive in Ames, Iowa. Mitch lives with his...
-
How does Net Income/Profit defer from the cash balance of a business? Why is it important to collect on receivables in a timely manner?
-
A progress report for the division of tourism promotion prepared for transactions through March 31 of the fiscal year that runs from July 1 to June 30 shows that the travel account, with a total...
-
BMX Company has one employee. FICA Social Security taxes are 6.2% of the first $137,700 paid to its employee, and FICA Medicare taxes are 1.45% of gross pay. For BMX, its FUTA taxes are 0.6% and SUTA...
-
It is 1:00 pm. Tim has waited for an hour in line to get a free Starbucks coffee. This has cost Tim $50.00 in lost wages for the hour of work he missed. He is told by the barista that it will take 30...
-
Some fringe benefits are deducted on a pre-tax basis and some fringe benefits are deducted on a post-tax basis. Is the employee better off when fringe benefits are deducted pretax basis or past tax...
-
Vikings Company pays Jim Reap gross earnings for the current two-week period of $4,500. Federal withholdings were withheld in the amount of $825.50 along with FICA (6% for Social Security and 1.5%...
-
On December 31, 20X3 Okay Company issued 10,000 $1000 face value 10-year, 9% bonds to yield 7%. The bonds pay interest semi-annually. On its financial statements (prepared under U.S. GAAP) for the...
-
Question 2 For an n x n matrix A = form) via (aij)
-
Syracuse Corp. believes that future real interest rate movements will affect exchange rates, and it has applied regression analysis to historical data to assess the relationship. It will use...
-
The following information is currently available for Canadian dollar (C$) options: Put option exercise price = $.75. Put option premium = $.014 per unit. Call option exercise price = $.76. Call...
-
Mike Suerth sold a call option on Canadian dollars for $.01 per unit. The strike price was $.76, and the spot rate at the time the option was exercised was $.82. Assume Mike did not obtain Canadian...
-
Speeds of bullet trains. Determine whether the data are qualitative or quantitative. Explain your reasoning.
-
Widths of veins in different species of leaves. Determine whether the data are qualitative or quantitative. Explain your reasoning.
-
American Standard Code for Information Interchange (ASCII) codes. Determine whether the data are qualitative or quantitative. Explain your reasoning.
Study smarter with the SolutionInn App