Chapter 16, Problem 26QA

Bank of Southern Vermont has determined that its inventory of 20 million euros (€) and 25 million British pounds (£) is subject to market risk. The spot exchange rates are $0.40/€ and $1.28/£, respectively. The σ’s of the spot exchange rates of the € and £, based on the daily changes of spot rates over the past six months, are 65 bp and 45 bp, respectively. Use adverse rate changes in the 90% confidence interval (critical value = 1.65 for 90% confidence interval). Question 1:  What is the DEAR of euros (€)? Question 2:  What is the DEAR of British pounds (£)?

Suppose that today the exchange rate between the U.S. dollar and the Chinese yuan is $1 = .12 yuan. If next week the exchange rate is $1 = .20 yuan, it is clear that: A)The yuan has depreciated relative to the dollar. B)Both currencies have depreciated. C)The dollar has depreciated relative to the yuan. D)Both currencies have appreciated

Suppose that you are a U.S.-based importer of goods from the United Kingdom. You expect the value of the pound to increase against the U.S. dollar over the next 30 days. You will be making payment on a shipment of imported goods in 30 days and want to hedge your currency exposure. The U.S. risk-free rate is 5.0 percent, and the U.K. risk-free rate is 4.0 percent. These rates are expected to remain unchanged over the next month. The current spot rate is $1.80. Required: Whether you should use a long or short forward contract to hedge the currency risk. Calculate the no-arbitrage price at which you could enter into a forward contract that expires in 30 days. Move forward 10 days. The spot rate is $1.83. Interest rates are unchanged. Calculate the value of your forward position.