Chapter 9, Problem 1IEE

Select all statements below that correctly distinguish currency forwards from currency futures:   Forwards are settled through clearinghouses. Futures traded at the CME are resettled daily to mark the value of the contract to the market value. Futures contracts are standardized in terms of currency amounts and expiration dates. Forwards have limited liability. Futures have unlimited liability. Forwards are customizable, over-the-counter (OTC) instruments. Forward contracts can be negotiated for any expiration date. Futures contracts are always dated for the last Monday of each month. Forward contracts do not have counterparty default risk.

A currency speculator wants to speculate on the future movements of the €. The speculator expects the € to appreciate in the near future and decides to concentrate on the nearby contract. The broker requires a 2% Initial Margin (IM) and the Maintenance Margin (MM) is 75% of IM. Following € Futures quotes are currently available from the Chicago Mercantile Exchange (CME). Euro (CME) - €125,000; $/€                   Open          High          Low        Settle       Change     Open Interest June          1.2216        1.2276        1.2175     1.2259     -0.0018       255,420 Sept          1.2229        1.2288        1.2189     1.2269    - 0.0018         19,335 In addition to the information provided above,  consider the following CME quotes that are available at the end of day one’s trading: Euro (CME) - €125,000; $/€                   Open          High          Low        Settle       Change     Open Interest June          1.2216        1.2276        1.2175     1.2176     -0.0083…

Suppose that you are a currency speculator, based in the U.S., attempting to capitalize on a possible depreciation of the Canadian dollar (C$). On January 1st, the spot rate for the Canadian dollar is $0.47. This is also the price at which futures contracts for Canadian dollars are being sold. You have C$360,000.00 to use on these positions. In the previous parts of this question, your sold a futures contract for Canadian dollars that will let you receive $169,200.00 for (C$360,000.00) on March 10th. When the Canadian dollar depreciated to $0.46 you purchased C$360,000.00 for $165,600.00 on February 10th. In total, after the futures contract you sold settles, you will have ________________   from these positions totalling ________$   .

Suppose, on a certain day in February, a speculator observes the following prices in the foreign exchange and currency futures markets:   GBP/USD spot: 1.6465   March futures: 1.6425   September futures: 1.6250   December futures: 1.6130   The speculator thinks that the markets are overestimating the weakness of sterling (GBP) against the dollar. How can she act on this view to make a profit? Under what circumstances do her actions lead to a loss?

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.

On 25 July of a particular year, an American firm decided to close its account at an Australian bank on 28 August. The firm is expected to have 4 million Australian dollars in the account at the time of the withdrawal. It would then covert the funds to U.S. dollars and transfer them to a New York bank. The September Australian dollar futures contract was priced at $0.7571. Determine the outcome of a futures hedge if on 28th August the spot rate was $0.7237 and the futures rate was $0.7250. All prices are in U.S. dollars per Australian dollar. The Australian dollar futures contract covers 100,000 Australian dollars

. A trader in Switzerland just agreed to trade Swiss francs for British pounds based on today's exchange rate. The trade is expected to settle tomorrow. What term best describes this exchange?  A.  Arbitrage transaction   B.  Forward trade   C.  Spot trade   D.  Purchasing power parity   E.  Interest rate parity

In the foreign exchange market, a ‘contract date’ is     the expiry date of a forward contract.     the date on which a futures contract is traded.     the date on which two banks start a currency swap.     the date on which a foreign exchange transaction is concluded.

Omni Advisors, an international pension fund manager, uses the concepts of purchasing power parity (PPP) and the International Fisher Effect (IFE) to forecast spot exchange rates. Omni gathers the financial information as follows: Base price level 100 Current U.S. price level 105 Current South African price level 111 Base rand spot exchange rate $ 0.192 Current rand spot exchange rate $ 0.175 Expected annual U.S. inflation 7% Expected annual South African inflation 5% Expected U.S. one-year interest rate 10% Expected South African one-year interest rate 8% Required: Calculate the following exchange rates (ZAR and USD refer to the South African rand and U.S. dollar, respectively): The current ZAR spot rate in USD that would have been forecast by PPP. Note: Do not round intermediate calculations. Round your answer to 4 decimal places. Using the IFE, the expected ZAR spot rate in USD one year from now. Note: Do not round intermediate calculations. Round your…