Maverik Avengers is an active currency trader based in Kuala Lumpur, Malaysia. He has been following the movements of € closely since the official Brexit. He notices that the exchange rates between the € and RM are quoted directly at 5.0500-80 and the available 90-day forward points for the currency pair are 180-200. If Avengers speculates the spot rates between the € and RM to be trading at 5.0600-50 at the end of 90 days, demonstrate how Avengers can make a speculation profit with RM10 million.

Maverik Avengers is an active currency trader based in Kuala Lumpur, Malaysia. He has been following the movements of € closely since the official Brexit. He notices that the exchange rates between the € and RM are quoted directly at 5.0500-80 and the available 90-day forward points for the currency pair are 180-200. If Avengers speculates the spot rates between the € and RM to be trading at 5.0600-50 at the end of 90 days, demonstrate how Avengers can make a speculation profit with RM10 million.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter27: Multinational Financial Management

Section: Chapter Questions

Problem 7MC

See similar textbooks

Similar questions

Vicky Gomez, a foreign exchange trader at Wells Fargo, can invest $1M, or the foreign currency equivalent of the bank's short term funds, in an uncovered or covered interest arbitrage with the United Kingdom. Arbitrage funds available to invest: $1M( or the equivalent in pounds) Spot rate ($/Ł) : 1.9422 90-day forward exchange rate ($/Ł): 1.9150 Expected 90-day spot exchange rate ($/Ł): 1.8810 U.S. dollar 90-day interest rate: 2.000% U.K. pound 90-day interest rate: 5.900% A.Should Vicky make an covered investment in the UK? Show work and give answer. B. Shoudl Vicky make an uncovered investment in the UK? Show work and give answer.
A currency trader observes that in the spot exchange market, 1 U.S.dollar can be exchanged for 3.58 Israeli shekels or for 109 Japanese yen. What is the cross-exchange rate between the yen and the shekel; that is, how many yen would youreceive for every shekel exchanged?
On April 10, the annualized six-month Aussie dollar rate in the Sydney market was 2.98％, the annualized six-month US dollar rate in the New York market was 0.32％, the spot exchange rate was $1=A$1.0689～1.0699, the six-month forward premium was 40~ 50, and a US bank borrowed 1 million US dollar to do the interest rate arbitrage. What will be the result of the transaction? please give your answer in intergers (unit: US dollars)
A currency trader observes that in the spot exchange market, 1 U.S. dollar can be exchanged for 3.5 Israeli shekels or for 112 Japanese yen. What is the cross-exchange rate between the yen and the shekel; that is, how many yen would you receive for every shekel exchanged? Do not round intermediate calculations. Round your answer to the nearest sen. Note: A sen is 1/100th of a yen.
Cleveland Company is a U.S. firm with a U.S. dollar functional currency that manufactures copper-related products. It forecasts that it will sell 5,000 feet of copper tubing to one of its largest customers at a price of ¥50,000,000. Although this sale has not been firmly committed, Cleveland expects that the sale will occur in six months on June 30, 2022. Thus, Cleveland is exposed to changes in foreign currency exchange rates. To reduce this exposure, Cleveland enters into a six-month foreign currency exchange forward contract with a third-party dealer on January 1, 2022, to deliver ¥ and receive US$. The foreign exchange contract has the following terms:Contract amount: ¥50,000,000Maturity date: June 30, 2022Forward contract rate: ¥105.00 = US $1.00Yen / US$ Exchange rates: Date Spot rate Forward rate for June 30 January 1 ¥100.00/US $1.00 ¥105.00/US $1.00 March 31 ¥102.00/US $1.00 ¥108.00/US $1.00 June 30 ¥110.00/US $1.00…
Maloney Corporation has decided to speculate on the foreign exchange market, and has entered into a 6-month forward contract to sell 250,000 Mexican pesos. When the forward contract was acquired on October 1, 2012, the spot rate for the peso was $0.1601 and the 6-month future was $0.1639. On December 31, 2012, the spot rate was $0.1616 and the future rate was $0.1607. On April 1, 2013, the spot rate was $0.1650. Spot Rate Forward Rate 10/1/12 0.1601 0.1639 12/31/12 0.1616 0.1607 4/1/13 0.1650 Prepare the necessary journal entries to record the forward contract Journal…
A British money financier is managing €10 million and wants to invest it in safe bonds either in France or United Kingdom for one year. The one-year interest rate on such assets is 0.63% in Britain and 0% in France. The one-year forward euro-pound exchange rate is 1.121 €/£ (euros per pound). Assume that the covered interest parity condition (CIP) always holds and to ensure consistency, treat the UK as home country. The current euro-pound spot exchange rate is calculated to be 1.1281... Suppose the financier believes that the uncovered interest parity (IP) condition also holds and the foreign exchange market participants are acting based on correct expectations about future spot euro-pound exchange rate in the sense that their expectations predict the future rate without bias. Given these assumptions, what is the one-year expected spot euro-pound exchange rate prevailing in the market? Now suppose that the financier believes that while the uncovered interest parity (IP) condition…
You checked with the foreign exchange dealer and find out that rate for Kuwaiti Dinar for 180 days transaction is trading at KWD 0.87/OMR. This exchange rate is referred to as___________ * Forward Rate Spot Rate Par rate Coupon rate
Emily Karlsen is a currency trader in Sydney and has 1 million Australian dollar (or the U.S. dollar equivalent) available. She considers 180 day arbitrage opportunities and retrieves the following current foreign exchange rates and interest rates: (Note that Australian dollar is regarded as the home currency.) Spot exchange rate in Sydney: $A1.1764/$US 6-month forward rate in Sydney: $A1.2575/$US U.S. dollar interest rate: 5.0 percent per annum Australian dollar interest rate: 7.0 percent per annum In the absence of transaction costs, is covered interest arbitrage (CIA) possible in the above case? If yes, calculate how much profit Emily Karlsen could make (annualized rate of return over her initial investment).
an investor has $2m to invest and has the option of placing it in a us bank account paying 2% annually, or in a german bank, where the annual rate of interest is only 2.5%. if the current exchange rate for the euro is given as $1.4250, at what 1-year dollar-euro forward rate of exchange would the investor get the same return from investing in the us as he/she would by investing in germany?
You work as a trader for the arbitrage desk at RawTrade, monitoring spot and futures foreign exchange rates. At 9am Eastern time you observe the following market prices and rates. The spot exchange rate between US$ and Canadian dollar is $1.1100/C$, while futures price of Canadian dollar for the contract maturing in 6 months is $1.0400/C$. The US 6-month interest rate is 6.5% per annum, while Canadian 6-month interest rate is 3.5% per annum. Both interest rates are based on continuous compounding. a. What is the no-arbitrage futures exchange rate? b. Given your answer in part (a) and data provided, describe in detail the arbitrage strategy that will earn profit and calculate your profit, assuming that you can lend or borrow 1000 units of a currency.
You work as a trader for the arbitrage desk at RawTrade, monitoring spot and futures foreign exchange rates. At 9am Eastern time you observe the following market prices and rates. The spot exchange rate between US$ and Canadian dollar is $1.1100/C$, while futures price of Canadian dollar for the contract maturing in 6 months is $1.0400/C$. The US 6-month interest rate is 6.5% per annum, while Canadian 6-month interest rate is 3.5% per annum. Both interest rates are based on continuous compounding. What is the no-arbitrage futures exchange rate? Given your answer in part (a) and data provided, describe in detail the arbitrage strategy that will earn profit and calculate your profit, assuming that you can lend or borrow 1000 units of a currency. Will US$/C$ futures exchange rate go up or down? Will US$/C$ spot exchange rate go up or down?