Problem 6
Exchange rate is currently $1.85 US per 1 British pound.
Interest rate is 4%...
Problem 6
Exchange rate is currently $1.85 US per 1 British pound.
Interest rate is 4% in the US and 3% in the UK. A bank is short a
futures contract on 1,000,000 pounds with F= $1.9 million in one
year.
Find the expected future spot exchange rate using the interest
rate parity
What risk is the bank facing?
Write the expression for the present value of the bank’s short
futures position, as a function of current spot exchange rate
S
Exchange rate is currently $1.85 US per 1 British pound.
Interest rate is 4% in the US and 3% in the UK. A bank shorts a
futures contract to buy 1,000,000 pounds for $1.9 million in one
year.
A. Find the expected future spot exchange rate using the
interest rate parity
B. What risk is the bank facing?
C. Write the expression for the present value of the bank’s
short futures position, as a function of current spot exchange rate...
Exchange rate is currently $1.85 US per 1 British pound.
Interest rate is 4% in the US and 3% in the UK. A bank is long a
futures contract to buy 1,000,000 pounds for $1.8 million in one
year.
a. If the spot exchange rate decreases by $0.10, what is
the dollar loss on the futures position?
b. In order to hedge its futures exposure, should the
bank borrow in the UK or invest in the UK? How much?
c....
Exchange rate is currently $1.85 US per 1 British pound.
Interest rate is 3% in the US and 4% in the UK. A bank is long a
futures contract on 1,000,000 pounds with F= $1.8 million in one
year.
Write the expression for the present value of the bank’s short
futures position, as a function of current spot exchange rate S
Value = 1,000,000 (S (1.04/1.03) – 1.8) / 1.03
Value = 1,000,000 (S (1.03/1.04) – 1.8) / 1.03
Value...
Suppose the Mexican peso British pound exchange rate is
currently at 22, and short run interest rates in the UK is 2%.
Explain (and compute) what will happen to the spot peso-pound
exchange rate if the future pound-peso rate remains 0.04 and the
Mexican interest rates is cut by 5%.
The spot exchange rate for the British pound is $1.2576. The
U.S. interest rate is 0.25 percent, and the British interest rate
is 0.50 percent. A futures contract on the exchange rate for the
British pound expires in 110 days. (a) Find the appropriate futures
price. [3M] (b) Find the futures price under the assumption of
continuous compounding. [3M] (c) Suppose the actual futures price
is $1.3250. Is the future contract mispriced? If yes, how could an
arbitrageur take advantage...
Covered Interest Arbitrage: The spot rate is currently: 1.6131
$/pound US interest rate 1.0% The 6 month forward is: 1.6022
$/pound UK interest rate 2.5% a.) Is Arbitrage possible? Use the
forward as a percentage to show why. What items do you compare to
arrive at your answer? Explain fully. b.) Us the forward as a
percentage in a sentence that correctly describes what it means.
c.) How to Profit. For this part show how the arbitrage would be
carried...
The current dollar−pound exchange rate is $2 per British pound.
A U.S. basket that costs $100 would cost $140 in the United
Kingdom. For the next year, the U.S. Fed is predicted to keep U.S.
inflation at 2% and the Bank of England is predicted to keep U.K.
inflation at 3%. The speed of convergence to absolute PPP is 15%
per year.
1. (Scenario: Monetary Approach in the Long-run) What is the
current U.S. real exchange rate with the United...
Assume the spot price of the British pound is currently
$1.8.
If the risk-free interest rate on 1-year government bonds is
4.4% in the United States and 7.2% in the United Kingdom, what must
be the forward price of the pound for delivery one year from
now?
(Do not round intermediate calculations. Round your answer to 3
decimal places.)
Spot and forward exchange rates for the British pound are as
follows: Spot exchange rate = 1.4500 USD/GBP, 90-day forward
exchange rate =1.4416 USD/GBP, 180-day forward exchange rate =
1.4400 USD/GBP. Additionally, a 180-day European call option to buy
1 GBP for USD 1.42 costs 3 cents, and a 90-day European put option
to sell 1 GBP for USD 1.49 costs 3 cents. Which of the following is
the correct arbitrage strategy?
Select one:
Buy the 90-day forward contract and...
(a) According to the law of one price, if the exchange rate
between British pound and Australian dollar is £1 = $2, a laptop
that is sold for £500 in London, calculate what should be the
selling price of the same laptop in Sydney?
(b) After six months, if the price of the laptop in question (a)
above expected to decrease from £500 to £450 in London and the
price of the same laptop decreases to $810 in Sydney, calculate...