Part A - Katie wants to buy a special chines tool. There is a one-year wait list, and the price is fixed at RMB 1MM. The current bid-ask spot rate is 6-7 RMB/USD, and the forward rate is 7-8 RMB/USD. U.S. interest rates are 10%, and Chinese rates are 20%, for borrowing or lending.

1. What is the least amount of USD you need today to buy a risk-free pug in one year.?

Part B - Due to special circumstances not buy or sell Chinese currency directly for USD but can only borrow and lend USD at 10%, and cannot borrow or lend foreign currency. But, you may use Japanese forward contracts. The one-year bid-ask forward exchange rates are 100-110 JPY/USD, and 16-17 JPY/RMB.

How can you get a special pug risk-free? How many USD do you need today? Explain specifically?

Must include calculations

Answer rating: 100% (QA)

Part A Using Forward Rate Assumptions Riskfree assetUSD RMB 1 million for the tool is fixed Bidask s... View the full answer