Question: UMB is considering in launching a new Absolute Currency Return Fund. In order to establish a currency hedging strategy, Caleb gathers the following information about

UMB is considering in launching a new Absolute Currency Return Fund. In order to establish a currency hedging strategy, Caleb gathers the following information about foreign exchange rates, spot rate, forward rate, inflation and interest rates.

Exhibit 5

USD/GBP

1.6500

CHF/USD

1.8460

Spot rate: USD/GBP

1.8328

90-day forward rate USD/GBP

1.8432

CAD/USD spot rate

1.18

Expected U.S. inflation

4%

Expected Canadian inflation

2%

U.S. Interest rate

8%

Canadian Interest rate

5%

QUESTION 1

Based on the data presented in Exhibit 5 and according to relative purchasing power parity:

A.

The Canadian dollar will depreciate by 2% and expected CAD/USD spot rate will be 1.1564.

B.

The Canadian dollar will appreciate by 2% and expected CAD/USD spot rate will be 1.1564.

C.

The U.S. dollar will depreciate by 2% and expected CAD/USD spot rate will be 1.2036.

QUESTION 2

Based on the data presented in Exhibit 5, the annualized forward GBP is discount or premium for theUSD/GBP (Spot rate: $1.8328 and forward rate: $1.8432) quote:

A.

2.27%, Premium and GBP is a strong currency.

B.

2.27%, premium and the USD is a strong currency.

C.

2.27%, discount and GBP is a weak currency.

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