Question

Suppose the following prevailed in the foreign currency market: $/€ (USD/EUR) spot: 1.800 $/€ (USD/EUR 90 day forward: 1.0810 $ (USD) interest rates 0.0075 (75 basis points or three fourths of one percent) € (EUR) interest rates 0.0010 (10 basis points or one tenth of one percent ) Use these data to answer the following three questions.

Question 12 (1 point) What is the forward premium/discount of the € (EUR)?

Question 13 (1 point) What is the USD - EUR interest differential?

Question 14 (1 point) If you had a trading authority of either $10,000,000 or 10,000,000€ how much profit could you make from a covered interest Arbitrage? Be sure to indicate if your profit is in USD or EUR.

Answer #1

Take the following two exchange rates and compute the EUR/INR
cross exchange rate. INR12.1225/USD and EUR.8145/USD.
In the question above, if there is a direct cross exchange rate
of EUR.066215/INR, is there a triangular arbitrage opportunity? If
yes, start with $50,000 and indicate how much triangular arbitrage
profit exists for 1 trip around the triangle. Show your work

A. Take the following two exchange rates and compute the EUR/INR
cross exchange rate. INR12.1225/USD and EUR.8145/USD.
B. In question A, if there is a direct cross exchange rate of
EUR.066215/INR, is there a triangular arbitrage opportunity? If
yes, start with $50,000 and indicate how much triangular arbitrage
profit exists for 1 trip around the triangle.

A U.S.-based Treasury risk manager is evaluating his EUR
hedging program with the following information regarding the
USD/EUR exchange rate and respective benchmark rates:
• Current USD/EUR exchange rate:
1.08
• Current USD 1-year risk-free
interest rate: 0.45%
• Current EUR 1-year risk-free
interest rate: -0.30%
Calculate the one-year forward USD/EUR exchange rate and explain
whether based upon the interest rate differential the EUR is
expected to appreciate or depreciate (8 points)

Currency
Spot quote
Euro (EUR/USD)
1.1278 - 1.1281
British pound (GBP/USD)
1.2845 - 1.2848
Swiss franc (USD/CHF)
1.0020 – 1.0022
Japanese yen (USD/JPY)
110.41 – 110.44
Dominican peso (USD/DOP)
50.540 – 50.600
Part 2. Forward exchange rates
1. If the 3-month forward bid and ask quotes for the British
pound are 15 21, what are the 3-month forward bid and ask exchange
rates?
2. How many US dollars will a customer that enters a 3-month
forward contract to buy £1...

1)Citibank quotes USD1.8500/GBP, Barclays quotes EUR1.5000/GBP,
and Dresdner quotes USD1.2000/EUR. If you have USD 1,000,000 to
invest, find the triangular arbitrage profit.
2)Amanda Smyth is a foreign exchange dealer for a bank in Texas.
She has USD 1,000,000 for a short-term money market investment and
wonders if she should invest in U.S. dollars for six months or make
a covered interest arbitrage (CIA) investment in the Japanese yen.
If she makes the CIA investment, what is the total amount that...

Question 10
A currency trader sees the following exchange rates.
1 USD = 1.355 CAD
1 USD = 0.935 EUR
1 EUR = 1.442 CAD
Is the CAD per EUR exchange rate in equilibrium?
Calculations required. Briefly explain. Show your
work. Use 3 decimals.
Question 11
Refer to information provided above (question 10). If the
Treasurer invests 15 million USD, show whether or not it would be
possible to profit from arbitrage?
Calculationsrequired. Show your
work. Use 3 decimals.

Angela has 1 million NZD and faces the following rates:
EUR/USD=1.1110/12,
USD/NZD=1.4505/09, EUR/NZD= 1.6136/1.6140.
a) Can Angela make a profit by trading the three currencies? If so,
how much profits in terms of NZD
can she make with her own fundsin one round? (Hint: choose the
right bid or ask price for trading)
b) If all traders on the spot market behave like Angela, what would
happen to the spot rates of the
three currencies and why? (Hint: the spread...

The following table contains information on spot and forward
exchange rates among U.S. dollar (USD), Malaysian ringgit (MYR),
Japanese yen (JPY) and Canadian dollar (CAD).
Currencies
3-month forward rate
Spot rate
USD/MYR
4.3936
4.3610
USD/JPY
107.3333
107.6400
USD/CAD
1.3856
1.3839
The following table contains information on the 3-month nominal
risk-free rate per annum for the four different currencies
3-month nominal risk-free rate
MYR
USD
CAD
JPY
4.00%
1.00%
1.50%
0.00%
Note that the Japanese yen 3-month nominal risk-free rate is...

Quotes for the dollar and euro are as
follows:
Spot contract
midpoint
S0EUR/USD = €0.8890/$
One-year forward contract midpoint
F1EUR/USD = €0.8960/$
One-year Eurodollar interest
rate
iUSD = 3% per year
a. Your
newspaper does not quote one-year Eurocurrency interest rates on EU
euros. Make your own estimate of iEUR.
b. Suppose
that you can trade at the prices for SEUR/USD,
FEUR/USD and iUSD just given and that you can
also either borrow or lend...

Quotes for the dollar and euro are as
follows:
Spot contract
midpoint
S0EUR/USD = €0.8890/$
One-year forward contract midpoint
F1EUR/USD = €0.8960/$
One-year Eurodollar interest
rate
iUSD = 3% per year
a. Your
newspaper does not quote one-year Eurocurrency interest rates on EU
euros. Make your own estimate of iEUR.
b. Suppose
that you can trade at the prices for SEUR/USD,
FEUR/USD and iUSD just given and that you can
also either borrow or lend...

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