Question

19) Current interest rates are
i_{$}=4%;i_{€}=6%. Expected interest rates next
year are: i_{$}=7%;i_{€}=3%. Expected spot rate in
two years is S_{2}($/€)=1.09. Use the asset market approach
to compute the current spot rate S0($/€). Please just type in the
number without the currency signs. For example, if your answer is
$1.25/€, then type in 1.25 as your final answer. Please
keep at least 2 decimal numbers (up to 5 decimal numbers).

18) Assume Carlton enters into a three-year fixed-for-fixed swap agreement to receive Swiss Franc and pay U.S. dollar annually, on a notional amount of $6,000,000. The spot exchange rate at the time of the swap is SF0.8/$. Which of the following statements is correct about Carlton's position on interest rates in the swaps?

Euro-€ |
Swiss franc |
U. S. dollar |
Japanese yen |
|||||

Years |
Bid |
Ask |
Bid |
Ask |
Bid |
Ask |
Bid |
Ask |

2 |
3.08 |
3.12 |
1.68 |
1.76 |
5.43 |
5.46 |
0.45 |
0.49 |

3 |
3.25 |
3.29 |
2.12 |
2.17 |
5.54 |
5.59 |
0.56 |
0.59 |

Select one:

a. Carlton receives 2.12% interest rate on Swiss Franc and pays 5.59% interest rate on U.S. dollar.

b. Carlton receives 1.76% interest rate on Swiss Franc and pays 5.46% interest rate on U.S. dollar.

c. Carlton receives 2.17% interest rate on Swiss Franc and pays 5.54% interest rate on U.S. dollar.

d. Carlton receives 5.59% interest rate on Swiss Franc and pays 2.12% interest rate on U.S. dollar.

e. Carlton receives 2.12% interest rate on Swiss Franc and pays 5.54% interest rate on U.S. dollar.

Answer #1

Part 19)

Expected spot rate after two year = $1.09/€

Current spot rate = Expected spot rate after two year*(1+i€ for next year)*(1+Current i€)/[(1+i$ for next year)*(1+current i$)] = 1.09*(1+0.03)*(1+0.06)/[(1+0.07)*(1+0.04)] = (1.09*1.03*1.06)/(1.07*1.04) = 1.190062/1.1128 = 1.0694

Current spot rate = $1.0694/€

Part 18)

Answer: a) Carlton receives 2.12% interest rate on Swiss Franc and pays 5.59% interest rate on US dollar.

Explanation:

Whenever a person making payment, has to pay in ask rate & receive in bid rate.

Either receive 1.68% or 2.12% on swiss franc & either pay 5.46% or 5.59% on US dollar

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