International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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Read the following information:
American Bank quotes a bid rate of $0.026 and an ask rate of $0.028 for the Indian rupee (INR);
Indian national bank quotes a bid rate of $0.024 and an ask rate for $0.025.
Locational arbitrage would involve _______.
A.
buying rupees from National Bank at the bid rate and selling them to American Bank at the ask rate
B.
buying rupees from National Bank at the ask rate and selling them to American Bank at the bid rate
C.
buying rupees from American Bank at the ask rate and selling to National Bank at the bid rate
D.
buying rupees from American Bank at the bid rate and selling them to National Bank at the ask rate
To hedge payables, the firm will purchase a currency call option on the payable foreign currency. The firm can use the call option to buy foreign currency at a specified price. Why should the company, in this case, purchase a call option than a Forward contract?
Maybe to make it easy on me, you can illustrate the answer by highlighting the situations suitable for options and Forward contracts. For example, "when this situation occurs....., then that hedging we should use .... because of XYZ reasons/effects on profitability".
Select each of the following strategies that can be used to hedge the foreign exchange risk of a British entity expecting to receive 1m INR in one year:
Group of answer choices
Borrowing GBP against the receivable, converting to INR, and investing the INR at Indian interest rates.
Entering a long position in a forward contract on the INR.
Entering a short position in a put on the INR.
Entering a long position in a put on the INR.
Borrowing INR against the receivable, converting to GBP, and investing the GBP at British interest rates.
Entering a short position in a forward on the INR.
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- If the firm ,NAB economists,had exposures in currencies such as Brazilian Real or Indonesian Rupiah,what options does the firm have in terms of hedging/foreign exchange risk managementarrow_forwardWhile visiting one of my friends at a local bank, I overheard a high ranking bank executive tell one of his colleagues that “a plain vanilla interest rate swap is a contract where two counterparties exchange cash flows based on the differences in the variation of two floating-rate indices where the payments are computed on an amortizing notional principal amount and can be used to hedge the interest rate risk for an institution with more rate sensitive assets than rate sensitive liabilities.” Comment on this statement and explain why it is right or wrong (while certain aspects of this question is similar to questions 8 and 9, it is trying to get at whether you understand interest rate swaps and what they are designed to do).arrow_forwardHow can we obtain a pay-domestic-floating, receive-foreign-fixed currency swap by using a pay-domestic-fixed, receive-foreign-fixed currency swap and an appropriate interest rate swap? Given the following American put option prices and current underlying share price of $304.75, check to see whether the given put options violate the lower bound condition. Where you detect a violation, devise an arbitrage strategy that will yield a positive cash flow now with zero possible cash flows in the future. Strike Put price 300 7.75 305 8.15 310 8.5 315 9.05arrow_forward
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