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

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. Based on the Uncovered Interest Rate Parity, the euro is
expected to appreciate by 4.5% against yen next three months.
b. 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-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. Based on the Uncovered Interest Rate Parity, the euro is
expected to appreciate by 4.5% against yen next three months.
b. To start a carry trade, a trader can short the euro against
yen in three-month forward contracts.
c. According to the asset market approach, the current spot rate...

Currently, interest rate is 2 percent per annum in the U.S. and
6 percent per annum in the euro zone, respectively. The spot
exchange rate is $1.25 = €1.00, and the one-year forward exchange
rate is $1.20 = €1.00. As informed traders recognize the deviation
from IRP and start carrying out covered interest arbitrage
transactions to earn a certain profit, how will IRP be restored as
a result?
A. Interest rate in the euro zone will rise; interest rate in...

Question 10.1-- (RCB) Royal Canada Bank needs to borrow $ 10
million in three months for a nine-month period. it buys a " three
against twelve" FRA for $10 million at a rate of 8% to hedge its
exposure. In three months the FRA settles at 7.5%. There are 273
days in the FRA period. What is the bank's net borrowing cost for
the 273 days ( at an annualized rate)?
Choices: a) 7.25% b) 7.50% c) 7.75% d) 8.00%...

You have $1,000,000 to start with. Yen Spot rate =106 Yen/$ Yen
FWD Rate=103.5 Yen/$ Interest rates in Japan are 4% per album (2%
for 6 months). Interest Rate in the USA are 8% per annum(4% for 6
months) for securities of similar risk and maturity. What should
you do?

A bank needs to hedge a 6-month gap in 6 months. They need to
profit if rates fall. Should the bank buy or sell an FRA? What rate
are they trying to hedge?
The amount they need hedged is $50,000,000. The rate they’re
hedging against is currently 2%. On the settlement date, the rate
ends up at 1.75%. Did the bank win or loss on this FRA? By how
much?
[SHOW STEPS AND CALCULATION]

A bank needs to borrow $10 million in three months for a
nine-month period. It buys a“three against twelve” FRA for $10
million at a rate of 8% to hedge its exposure. In three months the
FRA settles at 7.5%. There are 273 days in the FRA period. What is
the bank’snet borrowing cost for the 273 days (at an annualized
rate)?

Q2. (5 pts total). Suppose the spot rate is Yen 90/$, the
three-month forward rate Yen 88/$ and the three-month yen interest
rate 2.5%. (Show your calculations!)
a) (5 pts). What is the implied three-month US$ interest
rate?

In an interest rate swap, ABC financial institution pays 6% per
annum and receives three-month LIBOR in return on a notional
principal of GBP 100 million with payments being exchanged every
three months. The swap has a remaining life of 14 months. The
average of the bid and offer fixed rates currently being swapped
for three- month LIBOR is 8% per annum for all maturities. The
three-month LIBOR rate one month ago was 7.8% per annum. All rates
are compounded...

Options Speculator: A speculator is considering the purchase of
five three-month Japanese yen call options with a striking price of
96 cents per 100 yen. The premium is 1.35 cents per 100 yen. The
spot price is 95.28 cents per 100 yen and the 90-day forward rate
is 95.71 cents. The speculator believes the yen will appreciate to
$1.00 per 100 yen over the next three months. As the speculator’s
assistant, you have been asked to prepare the following:
a.Graph...

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