Question

6)The three-month interest rate on yen is i¥=1% per annum; the three-month interest rate on euros is i€=5.5% per annum. Which one of the following statements is correct?

Select one:

a. In a carry trade between euro and yen for three months, the profit will be ¥0.0315(for each yen borrowed) if the euro has appreciated 2% against yen in the three months.

b. Based on the Uncovered Interest Rate Parity, the euro is expected to appreciate by 4.5% against yen next three months.

c. According to the asset market approach, the current spot rate should be ¥1.293/€ if the expected three-month spot rate S3(¥/€)=1.250.

d. To start a carry trade, a trader can short the euro against yen in three-month forward contracts.

e. The euro is going to appreciate in the next year.

5) A bank is considering using a “three against six” $2,000,000 FRA to cover its potential loss. The purpose of the FRA is to cover the interest rate risk caused by the maturity mismatch from having made a six-month Eurodollar loan and having accepted a three-month Eurodollar deposit. The agreement rate with the buyer is 4.6%. There are actually 92 days in the three-month FRA period. Which one of following statements is correct?

Select one:

a. If the settlement rate is 4.8% three months from today, then the buyer pays the seller.

b.If the settlement rate is 4.8% three months from today, then the FRA is worth $1009.84

c. Without the FRA, the bank will lose if the market interest rate drops at the end of three months.

d. To hedge the risk caused by maturity mismatch, the bank could take the buyer’s position if it uses the Euro-Dollar Interest Rate Futures instead.

e. To hedge the loss caused by maturity mismatch, the bank should be a seller of the FRA.

Answer 1