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- Assume you are a trader with Deutsche Bank. From the quote screen on your computer terminal, you notice that Dresdner Bank is quoting EUR/USD at 1.2459 and Credit Suisse is offering USD/CHF at 0.8850. You learn that UBS is making a direct market between the Swiss franc and the euro, with a current EUR/CHF of 1.1048. (Ignore bid-ask spreads for this problem.) Assume you have $5,000,000 with which to conduct the arbitrage. What is the EUR/CHF rate that eliminate triangular arbitrage? (X.XXXX)It’s Sept. 2015. Division A of U.S. Toys Inc. owes 1.5 mil. C$ to a Canadian firm to be paid in February 2016, but another Division B of the U.S. Toys Inc. will receive 2.3 mil. C$ from a different Canadian client also in February 2016. U.S. Toys Inc. plans to transact in spot foreign exchange market to exchange US dollars and Canadian dollars (C$) in February 2016. U.S. Toys Inc. should engage in _______ hedge, hedging ______ million C$ in the futures market. Please explain. a. Short; 0.8 b. Long; 0.8 c. Short; 2.3 d. Long; 2.3 e. Short, 1.5EAFE Weight Return on Equity index Currency appreciationE1/E0-1 Managers Weight Managers Return Europe 0.3 20% -20% 0.25 18% Australia 0.1 15% 10% 0.20 20% Far east 0.6 25% 0 0.55 30% All exchange rates are expressed as units of foreign currency that can be purchased with one U.S. dollar. Answer the following about decomposing the manager's performance.What is the difference in return of the manager's portfolio due to country selection?
- Suppose that the current EUR/GBP exchange rate is £0.86 per euro. The current 6-month interest rates are: GBP 4%, EUR 6%. There are three 6-month forward contracts available, with the following exchange rates: Contract A B C EUR/GBP 0.86 0.85 0.90 Given the current EUR/GBP exchange rate and the available forward contracts, can you identify any arbitrage opportunities? If yes, provide two examples. In each case, calculate arbitrage profit and explain how this profit can be earned.As you know, when Greece joined the euro area in 2001, its long-term interest rates converged with Germany's (core country of the euro area). This long-rate convergence had also occurred within the set of original euro area members, around the time of the advent of the euro (1998). During the global financial crisis, some of those spreads have reemerged, and recently, Greek 10-year rates were about 1,000 basis points higher than Germany's. Given your reading of the case, and in light of the theory covered in our lectures answer the following questions: Q1) Do you think the level of German long-term rates will increase or decrease over the next year? WhyEach of the governments of Brazil and Turkey has issued bonds in Brazilian real (BRL) and Turkish lira (TRY), respectively. Assume that both government securities are one-year bonds, i.e., paying the face value of the bond one year from now. Suppose that the exchange rate, E, stands at 1 Brazilian real per 0.79 Turkish lira. The following table gives face values and prices of both bonds: Face Value Price Brazil BRL 10,000 BRL 9,630 Turkey TRY 10,000 TRY 9,450 Compute the nominal interest rate on each of the bonds. Compute the expected exchange rate next year consistent with uncovered interest parity. If you expect the real to depreciate relative to the lira, which bond should you buy? Assume that you are a Brazilian investor. You exchange the reals for liras and purchase the Turkish bond. One year from now, it turns out that the exchange rate, E, is 0.75, i.e., 0.75 liras buy one real. What is your realized rate of return in reals compared to the realized rate of return…
- Variations in the foreign exchange rate can impact on the profitability of businesses. Explainwhat measures can be taken by a firm to reduce the foreign exchange risksIn answering the question, you should emphasize the line of reasoning that generated your results; it is not enough to list the results of your analysis. Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. Suppose that Singapore wants to return the exchange rate to 1 euro = 0.58 Singaporean dollars. Should the Singaporean central bank buy or sell euros in the foreign exchange market? Instead of buying or selling euros, what domestic open-market operation can the Singaporean central bank use to achieve the same result? Explain.1. What is the exchange rate between the U.S. and Germany? Has there been appreciation or depreciation of the U.S. dollar relative to Germany's currency? 2. As a manager, how does this affect your decision to expand into Germany? Will it affect your costs or ability to produce in Germany? 3. Would you recommend your firm expand into Germany? If so, would you produce the product/service in Germany? Would you expand to sell the product/service to a new target market? If you don’t think your firm should expand into Germany, why?
- Based on class concepts, will the depreciation of Turkey's currency increase Turkish exports in the long-run? LR = long run Group of answer choices Yes, because the depreciation of the Turkish Lira will increase LR exports due to to expenditure switching No, because the depreciation of the Turkish Lira will decrease LR exports due to to expenditure switching No, because the depreciation of the Turkish Lira will decrease LR exports due to negative valuation effects Yes, because the depreciation of the Turkish Lira will increase LR exports due to the benefit of valuation effectsLet's suppose you have $1 million to invest. You are considering to invest in UK first, then convert the British Pound back to US$ in the future. You know following information: Annual Interest rate on investment in US: 2% Annual Interest rate on investment in UK: 4% Investment period: 1 year Current exchange rate: 1.48 $/BP Forward exchange rate which you can apply when converting BP to US$: 1.47 $/BP What would be profit if you apply the covered-interest arbitrage? Group of answer choices None of the above About $48,382 About $40,542 About $24,254A currency swap is equivalent to a a. long-dated forward foreign exchange contract, where the forward rate is the current spot rate. b. currency option, with the exercise price equal to the current spot rate c. short-term currency futures contract d. interest rate swap, where the basis is the differential between the fixed and floating interest rates
