Chapter 20, Problem 15QA

assuming japan to be the home country, suppose you have the following data: Japanese interst rate=1% p.a., Brazilian interest rate = 10% p.a. Spot rate=0.025BRL/Yen,  1 year forward rate=0.026BRL/yen 1). Compute the annualized forward premium/discount on Yen b). Compute the annual interest rate differential between countries c). is tere a possibilit for earning risk-free profit? if soc compute the profit if you have an equivalent of 100 million Yen at your disposal. d). what is such a profit called? e). at what forward rate, the profit making arrangement will lose its lucrativeness?

Diamond Bank expects that the Singapore dollar will depreciate against the dollar from its spot rate of $.43 to $.42 in 60 days. The following  interbank lending  and borrowing  rates exist:   Lending Rate Borrowing Rate U.S. dollar 7.0% 7.2% Singapore dollar 22.0% 24.0%   Diamond Bank considers borrowing 10 million  Singapore dollars in the interbank market a nd investing  the funds in dollars for 60 days. Estimate the profits (or losses) that could be earned from this strategy. Should  Diamond Bank pursue this strategy?

Hedging using forward rates:  Assume the hypothetical spot rate between the JPY and USD was 101.25 JPY per USD. Suppose you are purchasing 2000000 JPY worth of microprocessors deliverable (product and payment) in 3 months with the contract set up between you and your supplier on Friday. How much is that shipment worth in USD. Assume that you want to hedge against exchange rate risk, and go to the bank. The financial specialist at the bank gives you the official 3 month forward rate at 101.18 JPY per USD. What does that imply for your payment to the bank in 3 months?