QUESTION 2 Mr. Alex, a British arbitrageur, has the following data. The one-year interest rate offered in the UK is 8%, while the one-year interest rate offered in Australia is 5%. The spot rate is £0.3000/AUD. Mr.Alex is offered a one-year forward contract at £0.312/AUD. He also being offered £120,000 or AUD250,000 credit facility. If Interest Rate Parity (IRP) is not holding, determine how would Mr.Alex carry out covered interest arbitrage (CIA) and compute the profit.
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- Give typing answer with explanation and conclusion 1. You enter an NDF to buy UYU (Uruguayan Peso) for $.0363/UYU. The contract size is UYU50,000,000 and the contract matures in six months. If the spot rate is $.0381/UYU in six months, will you owe the bank money, or will the bank owe you money? How much in total? If the spot rate is $.0346/UYU in six months, will you owe the bank money, or will the bank owe you money? How much in total?McDougan Associates (USA). McDougan Associates, a U.S.-based investment partnership, borrows €80,000,000 at a time when the exchange rate is $1.3460 = €1.00. The entire principal is to be repaid in three years, and interest is 6.250% per annum, paid annually in euros. The euro is expected to depreciate vis-à-vis the dollar at 3% per annum. What is the effective cost of this loan for McDougan?Q1 A U.S. investor obtains Ghana cedis when the cedi is worth $.33 and invests in a one-year money market security that provides a yield (in cedis) of 24%. At the end of one year, the investor converts the proceeds from the investment back to dollars at the prevailing spot rate of $.26. What is the effective yield earned by this foreign investor? Q2 You have just been offered a commercial paper with a face value of $45,000,000 and a purchase price of $40,000,000 which matures in 182 days. What is the discount yield on this commercial paper? Q3 Ecobank holds a $450million T-Bill but is in short of cash. It needs cash to meet the requirement of a customer who has come to withdraw $400million. You have been asked to approach Barclays Bank to sell the T-Bill for $395.5million on Monday morning with an agreement to repurchase the bill on Friday evening.What is the Repo Rate on this transaction?
- A Canadian supplier is offering two options to his American client to pay for an equipment: paying 13,000 Canadian dollars now or paying 10,000 US dollars in 6 months. If the annual interest rate for the Canadian dollar is 5% and for the US dollar is 8%, what is the "implied" exchange rate? Question 5 options: CAD0.7581/USD. CAD1.3520/USD. CAD0.7505/USD. CAD1.3190/USD. CAD1.3325/USD. CAD0.7396/USD.Assume the spot rate between the uk and the US is .€ .6789= $1 while the one year Foward rate is €.6782=$1. The risk free rate in the UK is 3.1 percent. The risk free rate in the U.S is 2.9 percent. How much profit can you earn for the year on a loan of $1,500 by utilizing covered interest abitrage?Q1 Kwamina Ansa have just graduated from the University of Ghana and is leaving on a vacation to see relatives aboard. Kwanina wishes to spend usd 1,000 each in Germany, New Zealand, and Great Britain (usd 3,000 in total). Access Bank Ghana offers him the following bid-ask quotes: usd/eur 1.304-1.305, usd/nzd 0.670.69, and usd/gbp 1.90-1.95.If Kwamina accepts these quotes, how many eur, nzd, and gbp does he have at departure?If Kwamina returns with eur 300, nzd 1,000, and gbp 75, and the exchange rates are unchanged, how many usd does he have? Q2 Suppose that instead of selling his remaining eur 300 upon return home, he wants to sell them in Great Britain. At the train station, he was offered gbp/eur 0.66-0.68, while a bank three blocks from the station offers gbp/eur 0.665-0.675. At what rate is he willing to sell his eur 300? How many gbp will you receive?
- An investor has $10m to invest and has the following options: 1) depositing it in a US bank account paying 3% annually, or 2) depositing it in a German bank, where the annual rate of interest is only 2%. Assume that today the current spot exchange rate for the Euro is given as $1.2750, while the 1-year Dollar-Euro forward rate is posted as 1.2995. a. Based on your knowledge of the relationship between interest rate differentials and the current dollar-euro forward premium or discount, in which country should the investor deposit her money? why? b. If you had the power to adjust the German interest rate, with all else constant, what rate would you establish, such that the investor is totally indifferent between depositing in either countries? Show your work and the logic behind it.(a) Steven Kurakiis a foreign exchange trader at Goldman Sachs in Tokyo. He is exploring covered interest arbitrage possibilities. He wants to invest $5,000,000or its yen equivalent in a covered interest arbitrage between US dollars and Japanese yen. He faced the following exchange rate and interest rate quotes. Is covered interest arbitrage profit possible in 180 days? If so, how? Assuming there are 360 days a year. Spot rate (yen/$)118.6 Annual forward rate (yen/$)117.8 Annual US dollar interest rate4.8% Annual Japanese yen interest rate3.4% b. Steven Kuraki observes that the yen/$ spot rate has been holding steady and that both dollar and yen interest rates have remained relatively fixed over the past week. Steven wonders if he should try an uncovered interest arbitrage and thereby save the cost of forwarding cover. Many of Steven’s research associates and their computer models are predicting the spot rate to remainclose to yen118/$ for the coming 180 days. Using the same…Tony Fernandes, a foreign exchange trader in Canada, has CAD. 4,000,000 forshort-term money market investment and wants to make profit based on thefollowing rates. Explain specific steps that Tony Fernandes must take to makea covered interest arbitrage.6-month Canadian interest rate: 1.60% per annum6-month Yen interest rate: 2.95% per annumSpot rate: JYP 93.1395/CAD.6-month Forward Rate JYP 93.8380/CAD.CAD = Canadian DollarJYP = Japanese Yen
