1) Assume the following: Spot USDBRL = 5.7500 6MO USD Money Market Rates = 0.50% 6MO BRL...

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Question:

1) Assume the following:

Spot USDBRL = 5.7500

6MO USD Money Market Rates = 0.50%

6MO BRL Money Market Rates = 9.00%

What is the 6MO USDBRL forward rate?(Recall that Money Market Rates are quoted as annualized rates)

Forward rate=Spot rate * ( 1 + brl rate*time in months / 12 ) / ( 1 + USD rate * time in months / 12 ) = 4.05 * ( 1 + 8.75% * 0.5 ) / ( 1 + 2.5% * 0.5 ) = 4.175

2)Assume the following:

Spot GBPUSD = 1.3800

12MO GBP Money Market Rates = 1.50%

12MO USD Money Market Rates = 0.75%

What is the 12MO GBP/USD forward rate?(Recall that Money Market Rates are quoted as annualized rate)

3) Considering questions 1 and 2 above, what underlying theory did you use to make your calculations?Briefly explain why it is important for managers to know and understand this theory.

I used the theory of forward rate

4)You are a currency trader sitting at your desk monitoring the currency markets.It's lunch time on a Friday before a long holiday weekend, so many dealers have stepped away from the trading desk and everything seems pretty quiet.You suddenly notice that you can buy EURUSD in the London market at 1.1900, you can buy USDCHF in New York at 0.9500, and you can sell EURCHF in Zurich at 1.1405.Given this information, is there an arbitrage opportunity?Support your answer mathematically.

5)You have been hired as a consultant to the central bank for a small country that, for many years, has suffered from repeated currency crises and rampant inflation.The country depends heavily on both the German and French financial and product markets.What type of exchange rate policy would have the greatest impact and reduce currency volatility between the client country and both Germany and France?

6) Under a fixed exchange rate system, the government bears the responsibility to ensure that the Balance of Payments is near zero.If the sum of the current and capital accounts do not approximate zero, the government is expected to intervene in the foreign exchange market by buying or selling official foreign exchange reserves.If the sum of the current and capital accounts is LESS THAN ZERO what action does the government need to take in order to preserve the fixed exchange rate?

7) Assume that the current price of a grande latte in Chicago is $4.75. Assume also that the current price of a grande latte in Dubai, U.A.E. is 12.00 dirham and that the current USDAED exchange rate is 3.6725.

A)What is the implied PPP of USDAED?

B)Using the assumptions above, what is the under (-) / over (+) valuation against the dollar in percentage terms?

C)What are the implications associated with your answers above?

8) Dutch Disease is a term applied to a problem in the 1970's whereby the Netherlands were experiencing massive and sudden inflows of capital from abroad.What was the cause of this sudden influx of capital, and what types of potential problems did it have for the Dutch or could it have for any small single resource country?

Use the data table to answer questions 9, 10, and 11:

EURUSD Spot Quotes

Bank

Bid

Ask

Citibank

1.1930

1.1935

HSBC

1.1935

1.1940

JP Morgan Chase

1.1925

1.1930

EUR/USD 6-month Forward Quotes

Bank

Bid

Ask

Barclays Bank

1.1870

1.1875

Royal Bank of Canada

1.1900

1.1905

6-month Interest Rates (annualized - simple interest)

Bank

Currency

Interest Rate

Bank of America

U.S. Dollar

0.50%

Deutsche Bank

Euro

1.50%

9) Given the above three spot quotations for EUR/USD is there an opportunity for arbitrage in the spot market?If so, from which banks would you choose for which transactions? Assume that your transactions in this potential spot market arbitrage could be done in increments of EUR 1,000,000. What would the USD profit be?

10) Assume that you are a U.S. corporation and need to buy EUR 3,000,000 to cover an A/P due in 6 months. Of the two banks that have quoted the forward prices, which bank would you use for your transaction?How much money did you save your company by choosing this price as opposed to the other price?

11) Is there a covered interest arbitrage opportunity?Start with the assumption that you will borrow 1,000,000 U.S. dollars and can convert them into Euro's at the spot rate of EURUSD=1.1935.Demonstrate your answer mathematically.

12) List several differences between futures contracts and forward contracts

13) Beth Harmon works for the currency trading unit of HSBC Bank in London. She speculates that in the coming months the dollar will rise sharply vs. the pound. What option's strategy should Beth use in order to maximize his profit on this speculative position?

14)Describe a foreign currency call option contract and describe a scenario for when a corporation might want to use a foreign currency call option contract.

15) Blowfast Corporation, a U.S. exporter, sold wind turbines to a Mexican customer at a price of 5,000,000 U.S. dollars.In order to close the sale, however, Blowfast needed to agree to make its invoice payable in Mexican pesos, thus agreeing to take on the exchange rate risk for the transaction.The USDMXN exchange rate on the day of the sale was 20.0000, making the cost to the customer (per the invoice) 100,000,000 pesos.The terms of payment were: net, 6 months.If the value of the peso fell against the U.S. dollar such that one dollar would buy 22.0000 pesos by the date the invoice needed to be paid, what dollar amount would Blowfast receive assuming that it exchanged the recently received pesos for U.S. dollars in a foreign exchange transaction on the payment date?How much money did Blowfast gain or lose because of the change in the exchange rate?