Question

# 19) Current interest rates are i\$=4%;i€=6%. Expected interest rates next year are: i\$=7%;i€=3%. Expected spot rate...

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 S2(\$/€)=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.

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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