The following spot exchange and six-month forward quotes exist: Spot: $/ = $1.4786/1 Forward: $/ =...

 

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The following spot exchange and six-month forward quotes exist: Spot: $/£ = $1.4786/£1 Forward: $/£ = S1.4724/£1 The term structure of interest rates for the two currencies is as follows: Term Structure of Interest Rates S 3 Month 2.25% 3.75% 6 Month 2.65% 4.00% 9 Month 2.85% 4.25% 12 Month 3.00% 4.55% (a) Is the forward correctly priced, and if not, what should its price be? (b) Using the covered interest arbitrage method, using either a million pounds or a million dollars, demonstrate and explain how you could make a risk-free profit from the price quoted. (C) Explain how over the short term and medium term a company that faces input prices in local currency and output prices in a foreign currency might deal with a sudden rise in the local currency? Which type of firms would be most affected? (d) Explain how over the short term and medium term a company that faces input prices in local currency and output prices in a foreign currency might deal with a sudden rise in the local currency. Which type of firms would be most affected? The following spot exchange and six-month forward quotes exist: Spot: $/£ = $1.4786/£1 Forward: $/£ = S1.4724/£1 The term structure of interest rates for the two currencies is as follows: Term Structure of Interest Rates S 3 Month 2.25% 3.75% 6 Month 2.65% 4.00% 9 Month 2.85% 4.25% 12 Month 3.00% 4.55% (a) Is the forward correctly priced, and if not, what should its price be? (b) Using the covered interest arbitrage method, using either a million pounds or a million dollars, demonstrate and explain how you could make a risk-free profit from the price quoted. (C) Explain how over the short term and medium term a company that faces input prices in local currency and output prices in a foreign currency might deal with a sudden rise in the local currency? Which type of firms would be most affected? (d) Explain how over the short term and medium term a company that faces input prices in local currency and output prices in a foreign currency might deal with a sudden rise in the local currency. Which type of firms would be most affected?

Answer rating: 100% (QA)

a Fair forward Rate for six months 14768 12651405 14672 No it is not correctly priced b Borrow t... View the full answer