QUESTION 1

1. Part I: Managing Transaction Exposures
2. Assume the following information:

• Spot rate: CHF/USD = 0.7142
• 90-day forward rate: CHF/USD = 0.7114
• USD 90-day interest rate: 3.75% (APR)
• CHF 90-day interest rate: 5.33% (APR)

1. The option data for July contracts is given the table below.
2. Strike price (CHF/USD)
3. Call Premium
4. Put Premium
5. 0.70
6. 2.55 per CHF
7. 1.42 per CHF
8. 0.72
9. 1.55 per CHF
10. 2.4 per CHF
11. U.S. Company ABC, which exports to Switzerland, expects to receive CHF 450,000 in 90 days. Should Company ABC use currency derivatives to hedge transaction risk? If yes, which derivatives should Company ABC use? Please use a contingency graph to support your choices and computation. If no, please explain why (20 points).
12. U.S. Company XYZ, which imports Swiss watches, needs to pay CHF 750,000 in 90 days. Should Company XYZ use currency derivatives to hedge transaction risk? If yes, which derivatives should Company XYZ use? Please use a contingency graph to support your choices and computation. If no, please explain why (20 points).
13. Note that the time to pay option premium and time to exchange currencies are different. Please account for the opportunity costs/profit (time value of option premium).
18. Part II: Triangular Arbitrage
19. Thequotations of exchange rates of US dollars,British pound,and the New Zealanddollar in National Bank is as below.
22. Quoted Bid Price
23. Quoted Ask Price
24. USD/GBP
25. 0.65
26. 0.66
27. NZD/USD
28. 0.50
29. 0.52
30. GBP/NZD
31. 2.72
32. 2.75
33. Is the triangular arbitrage feasible? If yes, how much is the triangular arbitrage profit when you have $500,000 to invest. If no, please explain why (20 points).
37. Part III:Interest Rate Parity and Covered Interest Arbitrage
38. Assume the followinginformation:
39. Current spot rate of Australian dollar=
40. $.65
41. Forecasted spot rate of Australian dollar 1 year from now
42. =
43. $.69
44. 1-year forward rate of Australian dollar
45. =
46. $.68
47. Annual interest rate for Australian dollar deposit
48. =
49. 5%
50. Annual interestrate in the United States
51. =
52. 8%
53. According to Interest Rate Parity, isthecovered interest arbitrage feasible toU.S. investors and Australian investors?Please explain your answers(20 points).
54. Supposean U.S. investorcan borrow up to$500,000 to invest and an Australian investorcan borrow up toAustralian $800,000 to invest.How much is the covered interest rate arbitrage profitfor the U.S. investor and Australian investor if thecovered interest arbitrage is feasible to them(20 points)?