1- Current spot exchange rate is $1.20/ and quarterly forward rate is $1.18/.Based on your research, you...
Question:
1- Current spot exchange rate is $1.20/£ and quarterly forward rate is $1.18/£. Based on your research, you expect the exchange rate to be $1.19/£ in three months. Let's say you have £1,000,000 available to you.
a. What is the current forward premium/discount on sterling?
b. What action do you need to take to speculate on your expectation of the exchange rate? If your expectation is correct, what is your profit/loss?
c. If the exchange rate is $1,175/£ three months later, what is your profit/loss?
2- While visiting Turin, Italy, you bought a Ferrari for 135.000 € with a maturity of three months. You have enough cash at your bank in New York that pays 0.35 per month compounded. Currently the spot rate is $1.15/€ and the quarterly forward rate is $1.14/€. In Turin, the money market investment rate for a cumulative quarterly investment is 2.0%. There are two ways to pay for your Ferrari:
a. Keep your money in the bank in the USA and buy 135.000 € futures
b. Buy spot today for a certain amount of € and deposit the amount in Turin for three months so that the maturity value is equal to € 135,000. Which method do you prefer?
3- Suppose the December 2016 Mexican Peso futures contract is $0.90975 per 10MXN. You believe the spot price in December will be $0.9700 per 10MXN. The size of 1 MXN futures contract is MXN500,000. What position do you need to enter to take advantage of your prospect? If you use three futures contracts, what will your profit/loss be if your belief is correct?
4- A speculator is considering buying five quarterly Euro call options (€100,000 each) for a striking price of $0.869/€. The premium is 1.35 cents per €. The spot price is US$0.84/€ and the 90-day forward rate is US$0.85/€. The speculator believes that the euro will rise to $0.91/€ in the next three months. As the speculator's assistant, you were asked to prepare the following:
a. Determine the profit of the speculator if the euro rises to $.91/€.
b. Determine the speculator's profit if the euro appreciates only by the forward rate
c. Determine the future spot rate at which the speculator will only break even.
5- Currently the spot rate is $1.50/£ and the quarterly forward rate is $1.52/£. The quarterly interest rate is 8.0% per annum in the US and 5.8% per annum in the UK. Let's say you can borrow up to $1 million. or £1 million.
a. Is there a secured interest arbitrage opportunity for a US multinational company? What's the payoff if the CIA runs it?
b. Is there a secured interest arbitrage opportunity for a UK multinational? What's the payoff if the CIA runs it?
c. How will the implicit interest rate parity be restored?
d. What should be the “correct” forward exchange rate?
6- Suppose the current spot rates are $1,15/€ and $1,25/£. Let's say a dealer offers you €1.18/. Is there a triangle arbitrage opportunity? Calculate your profit for $1 million. starting amount
7- Briefly discuss the advantages and disadvantages of fixed and floating exchange rates.
8- “If a country has a currency board, all monetary policy is on autopilot”. explain this expression
9- What are the macroeconomic effects of the appreciation/depreciation in the exchange rate?
10- What is the main difference between direct and indirect interventions in foreign exchange markets?
Microeconomics An Intuitive Approach with Calculus
ISBN: 978-0538453257
1st edition
Authors: Thomas Nechyba