EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 23, Problem 5CP
A
Summary Introduction
To calculate: Theoretical price of future contract for 6 months Japanese yen/ U.S. dollar currency futures contract using the data given.
Introduction: A P.I is a banker in Japanese bank. She collected some data to calculate the future price of japans yen / U.S dollars for 6 months. The exchange rate is ¥124.30/$1.00 with interest rate in Japan is 0.10% and in U.S is 3.80%.
B
Summary Introduction
To calculate: Arbitrage profit to borrow the $1 million dollar to purchase Japanese yen.
Introduction: A P.I again reviews the future price of 3 months and she noticed that the interest rate has increased 0.50%. Here is an opportunity of arbitrage gain to borrow the $1million dollar to purchase Japanese yen.
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You work as a trader for the arbitrage desk at RawTrade, monitoring spot and futures foreign exchange rates. At 9am Eastern time you observe the following market prices and rates. The spot exchange rate between US$ and Canadian dollar is $1.1100/C$, while futures price of Canadian dollar for the contract maturing in 6 months is $1.0400/C$. The US 6-month interest rate is 6.5% per annum, while Canadian 6-month interest rate is 3.5% per annum. Both interest rates are based on continuous compounding.
a. What is the no-arbitrage futures exchange rate?
b. Given your answer in part (a) and data provided, describe in detail the arbitrage strategy that will earn profit and calculate your profit, assuming that you can lend or borrow 1000 units of a currency.
You work as a trader for the arbitrage desk at RawTrade, monitoring spot and futures foreign exchange rates. At 9am Eastern time you observe the following market prices and rates. The spot exchange rate between US$ and Canadian dollar is $1.1100/C$, while futures price of Canadian dollar for the contract maturing in 6 months is $1.0400/C$. The US 6-month interest rate is 6.5% per annum, while Canadian 6-month interest rate is 3.5% per annum. Both interest rates are based on continuous compounding.
What is the no-arbitrage futures exchange rate?
Given your answer in part (a) and data provided, describe in detail the arbitrage strategy that will earn profit and calculate your profit, assuming that you can lend or borrow 1000 units of a currency.
Will US$/C$ futures exchange rate go up or down?
Will US$/C$ spot exchange rate go up or down?
Use the following information for Problems 21 and 22.On November 1, 2017, Dos Santos Company forecasts the purchase of raw materials from a Brazilian supplier on February 1, 2018, at a price of 200,000 Brazilian reals. On November 1, 2017, Dos Santos pays $1,500 for a three-month call option on 200,000 reals with a strike price of $0.40 per real. Dos Santos properly designates the option as a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2017, the option has a fair value of $1,100. The following spot exchange rates apply:What is the net impact on Dos Santos Company’s 2018 net income as a result of this hedge of a forecasted foreign currency transaction? Assume that the raw materials are consumed and become a part of the cost of goods sold in 2018.a. $80,000 decrease in net income.b. $80,600 decrease in net income.c. $81,100 decrease in net income.d. $83,100 decrease in net income.
Chapter 23 Solutions
EBK INVESTMENTS
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