Suppose that the invester of GMO has an extra cash reserve of $700,000 to invest in Mexico. The expected inflation rate is 1.29% in US and 3.37% in Mexico. The expected interest rate is 1.49% per year in the United States and 6.47% per year in Mexico. Currently, the nominal spot exchange rate is 19.780 Pesos per dollar and the nominal one-year forward rate is 19.790 pesos per dollar. The future spot exchange rate is 19.680 Pesos per US $1. Assess how he can construct an arbitrage portfolio based on appropriate calculations.

Q: Suppose 6 months ago a Swiss investor bought a 6-month U.S. Treasury bill at a price of $9,708.74,…

A: Given: T bill price = $9,708.74 Maturity value = $10,000 Exchange rate = 1.4200 Swiss francs Forward…

Q: You must make a $1,000,000 domestic payment in New York City in 90 days. The dollars are available…

A: This question is regarding investment in foreign money market instruments by covering the currency…

Q: XYZ Corporation, located in the United States, has an accounts payable obligation of ¥1500 million…

A: Money Market Hedge - It refers to the method under which a company's domestic currency is locked in…

Q: Cresskill, Inc., has an investment opportunity in Europe. The project costs €10 million and is…

A: Net Present Value: The difference between the present value of cash inflows and the present value of…

Q: Suppose you are a U.S. investor who is planning to invest $845,000 in Mexico. Your Mexican…

A: DATA GIVEN: Investment amount  = $845,000 Investment gain in Mexico = 10.6% Exchange rate: Original…

Q: If the U.S. economy experiences growth in the future, the property will be worth $50,000,000 and the…

A: Data given:: i)   Growth: Property will be worth $50,000,000 and the exchange course of 1 dollar…

Q: A U.S. company can borrow 10,000 pounds in Great Britain for 6% interest, paying back 10,600 pounds…

A: Here, Borrowing Amount is 10,000 pounds Amount paid back in year is 10,600 pounds Interest Rate of…

Q: Suppose that you are a U.S.-based importer of goods from the United Kingdom. You expect the value of…

A: In this we have to calculate no arbitrage price according to interest rate parity principles.

Q: On May 1, 2XX3, a bundle of goods in China costs 5,000,000 yuan, while the same goods cost $60,000…

A: In this we have to consider purchase power parity principal to calculate the future exchange rate.

Q: If the international fisher effect holds, and if the following information is given, what should be…

A: The International Fisher Effect (IFE) is an economic theory stating that the expected disparity…

Q: Suppose you exported something from Mexico to the US and were quoted a price (payable immediately)…

A: Export: A product or service that is manufactured in one nation but sold to a buyer in another…

Q: change in the Mexican peso is 1% during the next quarter, the maximum one-quarter loss is about 65…

A: There are change in the exchange rate due to which there high fluctuations in value of goods and…

Q: pose the annual interest rates in the U.S. (home nation) and the U.K (foreign nation) are 8% and 6%,…

A: There are benefits due to change in the exchange rate change over period of time.

Q: bought a 1-year U.S. Treasury security at a price of $9,708.74, with a maturity value of $10,000.…

A:

Q: In the foreign exchange spot market, one Indian Rupee can buy 2.80 Malaysian Ringgit. The Malaysian…

A: Solution:- Foreign exchange rate means the price of one currency in terms of another currency.

Q: ABC Company, a British company, expects to receive $10,000,000 in 30 days. It wants to hedge its…

A: Forward is the contract made by two parties for deferring the transaction but the quantity and…

Q: Malaysian investor has an amount of RM10 million being invested in a US dollar deposit account at a…

A: Note: This question has two parts.  In order to answer the second part, the local interest rate in…

Q: Assume that Hampshire Co. has net payables of 200,000 Mexican pesos in 180 days. The Mexican…

A: Money market hedge is using money market to hedge the risk from foreign currency fluctuations

Q: what actions do you need to take to use these rates to earn a profit? what is the expected dollar…

A: Forward Exchange Contract is the type of foreign currency transaction. It is an agreement between…

Q: AAA Inc. is a U.S. Firm that has substantial international business in Japan and has cash inflows in…

A: Value at risk is a measure of the risk of investment. Given the normal market condition in a set of…

Q: Assume that the rate of inflation in Turkey will run about 5 per cent higher than the UK inflation…

A: Purchasing power parity is an economic term for measuring prices at different locations.

Q: The spot exchange rate is $0.19 per Brazilian real in American terms. Assume interest rates are…

A: Arbitrage profit In finance, arbitrage profit is a profit earned by taking advantage of a difference…

Q: Chapman, Inc.'s Mexican subsidiary, V. Gomez Corporation, is expected to pay to Chapman 20 pesos in…

A: Here, No. of shares is 5,000,000 Growth rate in dividend is 5% depreciation rate in exchange rate is…

Q: 1.A research institution has just published projected inflation rates for the United States and…

A: The interest rate parity is a no-arbitrage situation where the future exchange rate between the…

Q: Suppose the inflation rate in Canada is 1 percent and the inflation rate in Mexico is 3 percent. If…

A: Meaning of Purchasing Power Parity    Purchasing power parity (PPP) is an economic theory of…

Q: Chapman, Inc.'s Mexican subsidiary, V. Gomez Corporation, is expected to pay to Chapman 50 pesos in…

A: Given information: Dividends amounted to 50 pesos Exchange rate in 1 year is $0.12 per peso Dividend…

Q: Assume that Ghanaian inflation rate is expected to average about 9% annually, while the Nigerian…

A: If an investor or other person wants to exchange one currency with the other currency then the rate…

Q: A U.S. company can borrow 10,000 pounds in Great Britain for 6% interest, paying back 10,600 pounds…

A: Given that U.S Company borrow 10000 pound at rate of 6%, they are supposed to provide the 10600…

Q: Suppose that the invester of GMO has an extra cash reserve of $700,000 to invest. The interest rate…

A: Arbitrage portfolio is one in which the company eanrs from the difference in the interest rate and…

Q: Suppose that the treasurer of IBM has an extra cash reserve of $400,000 to invest for six months.…

A: Given information, Interest rate (I$)=4.3/2 =2.15% Interest rate (I€)= 3.2/2 =1.6% Spot exchange…

Q: An investor based in the US invests $1,200 in Mexico and this generates a future value in one year…

A: Future Value in US          1,344.44 Future Value in Mexico (1344.44 * 5.4)         7,259.98

Q: Suppose annual inflation rates in the U.S. and Mexico are expected to be 6.5% and 75%, respectively,…

A: Assuming 75% inflation is not a typo Peso spot in t years=Spot now"(1+US rate)^t/(1+Mexico rate)^t…

Q: Suppose a U.S. investor wishes to invest in a British firm currently selling for £24 per share. The…

A: In International Investments, exchange rate is a significant factor which is required to be analyzed…

Q: Assume that Stevens Point Co. has net receivables of 100,000 Singapore dollars in 90 days. The spot…

A: Money market hedge is using money market to hedge the risk of change in foreign currency…

Q: We have 100 million South African rands that are payable in one year (we have to pay it to a South…

A: Concept. Forward contract , options are various techniques used for hedging.

Q: Ghana’s inflation is forecasted to be 10.2% over the coming year whilst that of South Africa is…

A: Exchange rate risk exposure is the financial exposure that an individual or business entity faces…

Q: A bundle of goods in Japan costs ¥2,642,000 while the same goods and services cost $32,500 in the…

A: Cost of a bundle of goods in country J is ¥2,642,000 Cost of a bundle of goods in country U.S. is…

Q: ider a U.S.-based company that exports goods to Switzerland. The U.S. Company expects to receive…

A: In this we need to calculate the forward rate based on the interest rate prevailing in both…

Q: The treasurer of IBM does not wish to bear any exchange risk. Where should he/she invest to maximize…

A: Information Provided: Cash Reserve = $100,000,000 United States interest rate = 8% (six-month)…

Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in the near past and is expected to be more affluent in the future. The use of exchange-traded derivative financial instruments has been multi-folded to provide for the requirements of various MNCs and offshore potential investors. Most banks and financial institutions have helped integrate the global economies. Our Government has introduced some bold and extreme measures to fulfil the purpose behind the fiscal, industrial, and monetary policies. The enactment of GST is a huge step towards streamlining the taxation system of the country. Owing to Covid-19, this aspect of corporate risk management has become critical.