Answered: The spot rate is KZT 467.02864 per US… | bartleby

International Financial Management

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter7: International Arbitrage And Interest Rate Parity

Section: Chapter Questions

Problem 41QA

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The spot rate is KZT 467.02864 per US dollar.

The one-year interest rate in the U.S. is 4.5 % versus 16.75 % in Kazakhstan. An investor purchased futures contracts on 1,000,000 US dollars.

Assuming that interest rate parity exists, determine the total amount of profit or loss from this futures contract based on the expectation that the US dollar will be worth KZT 452 in one year. Show your calculations.

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On January 11, the spot exchange rate for the U.S. dollar is $0.70 per Canadian dollar. In one year’s time, the Canadian dollar is expected to appreciate by 20 percent or depreciate by 15 percent. We have a European put option on U.S. dollars expiring in one year, with an exercise price of 1.39 CND$/US$, that is currently selling for a price of $2.93. Each put option gives the holder the right to sell 10,000 U.S. dollars. The current one-year Canadian Treasury Bill rate is 2 percent, while the one-year U.S. Treasury Bill rate is 3 percent, both compounded annually. Treat the Canadian dollar as the domestic currency. a. What is the estimated value of this put option by using the binomial model?
On January 11, the spot exchange rate for the U.S. dollar is $0.70 per Canadian dollar. In one year’s time, the Canadian dollar is expected to appreciate by 20 percent or depreciate by 15 percent. We have a European put option on U.S. dollars expiring in one year, with an exercise price of 1.39 CND$/US$, that is currently selling for a price of $2.93. Each put option gives the holder the right to sell 10,000 U.S. dollars. The current one-year Canadian Treasury Bill rate is 2 percent, while the one-year U.S. Treasury Bill rate is 3 percent, both compounded annually. Treat the Canadian dollar as the domestic currency. b. Calculate the estimated value of this put option for U.S. T-Bill rates of 0%, 1%, 2%, 4%, 5%, and 6%. Plot these values in a graph (by hand or using Excel), with put option values on the y-axis and U.S. T-bill rates on the x-axis. What can we conclude about the relationship between foreign interest rates and foreign currency put option values?

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