Based on Exhibit A, the forward premium or discount for a 360-day INR/GBP forward contract is closest
Question:
Based on Exhibit A, the forward premium or discount for a 360-day INR/GBP forward contract is closest to:
A. -1.546 .
B. 1.546 .
C. 1.576 .
Transcribed Image Text:
Ed Smith is a new trainee in the foreign exchange (FX) services department of a major global bank. Smith's focus is to assist the senior FX trader, Feliz Mehmet, CFA. Mehmet mentions that an Indian corporate client exporting to the United Kingdom wants to estimate the potential hedging cost for a sale closing in one year. Smith is to determine the premium or discount for an annual (360-day) forward contract using the exchange rate data presented in Exhibit A: Exhibit A: Select Currency Data for GBP and INR Spot (INR/GBP) Annual (360-day) LIBOR (GBP) Annual (360-day) LIBOR (INR) 79.5093 5.43% 7.52% Mehmet is also looking at two possible trades to determine their profit potential. The first trade involves a possible triangular arbitrage trade using the Swiss, U.S., and Brazilian currencies, to be executed based on a dealer's bid/offer rate quote of 0.5161/0.5163 in CHF/ BRL and the interbank spot rate quotes presented in Exhibit B: Exhibit B: Interbank Market Quotes Currency Pair CHF/USD BRL/USD Bid/Offer 0.9099/0.9101 1.7790/1.7792 Mehmet is also considering a carry trade involving the USD and the euro. He anticipates it will generate a higher return than buying a one-year domestic note at the current market quote due to low U.S. interest rates and his predictions of exchange rates in one year. To help Mehmet assess the carry trade, Mehmet provides Smith with selected current market data and his one-year forecasts in Exhibit C: Exhibit C: Spot Rates and Interest Rates for Proposed Carry Trade Today's One-Year LIBOR Currency Pair (Price/Base) Projected Spot Rate USD 0.80% CAD/USD Spot Rate Today 1.0055 in One Year 1.0006 CAD 1.71% EUR/CAD 0.7218 0.7279 EUR 2.20% Finally, Mehmet asks Smith to assist with a trade involving a U.S. multinational customer operating in Europe and Japan. The customer is a very cost-conscious industrial company with an AA credit rating and strives to execute its currency trades at the most favorable bid/offer spread. Because its Japanese subsidiary is about to close on a major European acquisition in three business days, the client wants to lock in a trade involving the Japanese yen and the euro as early as possible the next morning, preferably by 8:05 a.m. New York time. At lunch, Smith and other FX trainees discuss how best to analyze currency market volatility from ongoing financial crises. The group agrees that a theoretical explanation of exchange rate movements, such as the framework of the international parity conditions, should be applicable across all trading environments. They note such analysis should enable traders to anticipate future spot exchange rates. But they disagree on which parity condition best predicts exchange rates, voicing several different assessments. Smith concludes the discussion on parity conditions by stating to the trainees: "I believe that in the current environment both covered and uncovered interest rate parity conditions are in effect." The conversation next shifts to exchange rate assessment tools, specifically the techniques of the IMF Consultative Group on Exchange Rate Issues (CGER). CGER uses a three-part approach that includes the macroeconomic balance approach, the external sustainability approach, and a reduced- form econometric model. Smith asks Leslie Jones, another trainee, to describe the three approaches. In response, Jones makes the following statements to the other trainees and Smith: Statement 1: "The macroeconomic balance approach focuses on the stocks of out- standing assets and liabilities." Statement 2: "The reduced-form econometric model has a weakness in underestimating future appreciation of undervalued currencies." Statement 3: "The external sustainability approach centers on adjustments leading to long-term equilibrium in the capital account."
Fantastic news! We've Found the answer you've been seeking!
Step by Step Answer:
Answer rating: 100% (1 review)
Answered By
Rashul Chutani
I have been associated with the area of Computer Science for long. At my university, I have taught students various Computer Science Courses like Data Structures, Algorithms, Theory of Computation, Digital Logic, System Design, and Machine Learning. I also write answers to questions posted by students in the area of and around Computer Science.
I am highly fortunate to receive great feedback on my teaching skills that keeps me motivated. Once a student sent me an email stating that I had explained to him a concept better than his professor did.
I believe in the fact that "Teaching is the best way to learn". I am highly fascinated by the way technology nowadays is solving real-world problems and try to contribute my bit to the same.
Besides tutoring, I am a researcher at the Indian Institute of Technology. My present works are in the area of Text Summarization and Signal and Systems.
Some of my achievements include clearing JEE Advanced with an All India Rank of 306 out of 1.5 million contesting candidates and being the Department Ranker 1 at my University in the Department of Computer Science and Engineering.
I look forward to providing the best Tutoring Experience I can, to the student I teach.
5.00+
1+ Reviews
10+ Question Solved
Related Book For
Economics For Investment Decision Makers
ISBN: 9781118111963
1st Edition
Authors: Sandeep Singh, Christopher D Piros, Jerald E Pinto
Question Posted:
Students also viewed these Business questions
-
Based on Exhibit C, the potential all-in USD return on the carry trade is closest to: A. 1.04 percent. B. 1.40 percent. C. 1.84 percent. Ed Smith is a new trainee in the foreign exchange (FX)...
-
Based on Exhibit B, the most appropriate recommendation regarding the triangular arbitrage trade is to: A. decline the trade, as no arbitrage profits are possible. B. execute the trade; buy BRL in...
-
Which of the following statements given by trainee Jones in describing the approaches used by CGER is most accurate? A. Statement 1 B. Statement 2 C. Statement 3 Ed Smith is a new trainee in the...
-
The balance sheet for the Heir Jordan Corporation follows. Based on this information and the income statement in the previous problem, supply the missing information using the percentage of sales...
-
What is the momentum of a proton traveling at v = 068c?
-
Let \(\left\{F_{n}ight\}_{n=1}^{\infty}\) be a sequence of distribution functions that converge in distribution to a distribution function \(F\) as \(n ightarrow \infty\). Prove that \[\lim _{n...
-
Respondents Varsity Brands, Inc., Varsity Spirit Corporation, and Varsity Spirit Fashions & Supplies, Inc., design, make, and sell cheerleading uniforms. Respondents have obtained or acquired more...
-
The Chicago Theater is owned by Rashied Davis. All facilities were completed on March 31. At this time, the ledger showed: No. 101 Cash $4,000, No. 140 Land $10,000, No. 145 Buildings (concession...
-
2 Charlie's Crispy Chicken (CCC) operates a fast-food restaurant. When accounting for its first year of business, CCC created several accounts. Account Name Description Balance Accounts Payable...
-
The factor least likely to lead to a narrow bid/offer spread for the industrial company's needed currency trade is: A. the timing of its trade. B. the company's credit rating. C. the pair of...
-
A country with a persistent trade surplus is being pressured to let its currency appreciate. Which of the following best describes the adjustment that must occur if currency appreciation is to be...
-
Does using plain language make you come across as less of an expert? Explain your answer.
-
Solve the differential equation. (Note: The constant of integration, C, will appear in your answer.) y = y' y= ()
-
An analysis of how much a service will cost versus how much you will gain from having that service performed is called a(n?
-
reference Arranged Arranged (201 and be sure to explain and defend your respons 06..05 points, At least 10 words > Which character in Arranged (2017), (assigned directly above, quick link here...
-
Accounting for management decisions can be different from accounting to provide financial statements. One aspect of accounting for management decisions is the budgeting process. Describe the...
-
A 36-KN load P is supported by the three rods below. Determine the following: a. The change in length of rod EF. b. The stress in each rod. AAB = ACD = 200 mm AEF = 625 mm EST = 200 GPa A C P B FL E...
-
A crate of mass 80 kg is held in the position shown. Determine (a) The moment produced by the weight W of the crate about E, (b) The smallest force applied smallest force applied smallest force...
-
Reconsider Prob. 1474. In order to drain the tank faster, a pump is installed near the tank exit as in Fig. P1475. Determine how much pump power input is necessary to establish an average water...
-
Why is there a trade-off between the amount of consumption that people can enjoy today and the amount of consumption that they can enjoy in the future? Why cant people enjoy more of both? How does...
-
How does investment as defined by economists differ from investment as defined by the general public? What would happen to the amount of investment made today if firms expected the future returns to...
-
Catalogue companies are the classic example of perfectly inflexible prices because once they print and ship out their catalogues they are committed to selling at the prices printed in their...
-
Predetermined Factory Overhead Rate Turbo Shop uses job order costing to determine the cost of performing engine repair work. Estimated costs and expenses for the coming period are as follows: Engine...
-
Given the following code: var a = 10; var b= 3; var c= 7; var d= a += b; 10 Q 1000; b = a % c; if (b>c) { d = 1; } else { d = 2; } What are the final values of a,b,c,d? a == b = C = d =
-
Entry for Factory Labor Costs A summary of the time tickets is as follows: Job No. 55 57 55 58 60 Indirect 66 67 Amount $2,950 2,450 4,480 . 5,130 15,720 3,130 2,050 13,900 70 Journalize the entry to...
Study smarter with the SolutionInn App