Question

In: Finance

Kavita Raman is a foreign exchange trader for a bank in New York. She can borrow...

  1. Kavita Raman is a foreign exchange trader for a bank in New York. She can borrow $1 million (or its Swiss franc equivalent) at her disposal for a short term money market investment. Kavita wonders whether she should make an uncovered interest arbitrage (UIA) transaction. She faces the following quotes:

Assumptions

Arbitrage funds available

$1,000,000

Spot exchange rate (SFr/$)

1.2810

3-month forward rate (SFr/$)

1.2740

U.S. dollar 3-month interest rate

4.800% per year

Swiss franc 3-month interest rate

3.200% per year
  1. Which currency should she borrow, and how much is the payoff in terms of U.S. dollars in case of uncovered interest arbitrage (UIA) transaction?

U.S. dollars; $1,538.46

Swiss franc; $1,538.46

U.S. dollars; $5,879.59

Swiss franc; $5,879.59

Solutions

Expert Solution

jeff jeffy answered 4 months ago
Next > < Previous

Related Solutions

Rose Lever is a foreign exchange trader for a bank in New York. She observes the...
Rose Lever is a foreign exchange trader for a bank in New York. She observes the following​ rates: Spot exchange​ rate: ​ SF0.9872/$ ​3-month forward​ rate: SF0.9907/$ ​3-month U.S. interest​ rate: 2% per annum ​3-month Swiss interest​ rate: 4% per annum a. Can you help Ms. Lever identify whether there is an arbitrage opportunity or not by calculating the theoretical forward​ rate? b. Can you help Ms. Lever form a covered interest arbitrage strategy to generate​ profit? Please describe each...
3.CIA Susan Prescott is a foreign exchange trader for a bank in New York. She has...
3.CIA Susan Prescott is a foreign exchange trader for a bank in New York. She has $1 million (or its Swiss franc equivalent) for a short term money market investment and wonders if she should invest in U.S. dollars for three months, or make a covered interest arbitrage (CIA) investment in the Swiss franc. She faces the following quotes: Assumptions Value SFr. Equivalent Arbitrage funds available $1,000,000 SFr. 994,000 Spot exchange rate (SFr./$)                    .9940 3-month forward rate (SFr./$)                    .9910 U.S....
Casper​ Landsten-UIA (B).   Casper Landsten is a foreign exchange trader for a bank in New York....
Casper​ Landsten-UIA (B).   Casper Landsten is a foreign exchange trader for a bank in New York. Using the values and assumptions​ below, he decides to seek the full 4.804​% return available in U.S. dollars by not covering his forward dollar receiptslong dash—an uncovered interest arbitrage​ (UIA) transaction. Assess this decision. Arbitrage funds available $ 950,000 Spot exchange rate (SFr/$) 1.2811 3-month forward rate (SFr/$) 1.2742 Expected spot rate in 90 days (SFr/$) 1.2697 U.S. Dollar annual interest rate 4.804 %...
Casper​ Landsten-UIA (B). Casper Landsten is a foreign exchange trader for a bank in New York....
Casper​ Landsten-UIA (B). Casper Landsten is a foreign exchange trader for a bank in New York. Using the values and assumptions​ below, he decides to seek the full 4.798 return available in U.S. dollars by not covering his forward dollar receipts —an uncovered interest arbitrage​ (UIA) transaction. Assess this decision. Arbitrage funds available $ 1,100,000 Spot exchange rate (SFr/$) 1.2809 3-month forward rate (SFr/$) 1.2744 Expected spot rate in 90 days (SFr/$) 1.2704 U.S. Dollar annual interest rate 4.798 %...
A foreign exchange trader based in the US, authorized to borrow $450,000 or its foreign currency...
A foreign exchange trader based in the US, authorized to borrow $450,000 or its foreign currency equivalent faces the following quotes: Spot rate: $1.3000/pound Six Month Forward: $1.3085/pound US Interest Rate: 3.0% per annum UK Interest Rate: 2.0% per annum Is covered Interest arbitrage possible, and if so, how much profit can the trader make via 1 covered interest arbitrage transaction? Please show all steps and work.
A foreign exchange trader working for a bank enters into a long position in a forward...
A foreign exchange trader working for a bank enters into a long position in a forward contract to buy one million pounds of sterling at an exchange rate of 1.6000 in three months. At the same time, another trader on the next desk takes a long position in 16 three month futures contracts on sterling. The futures price is 1.6000, and a futures contract is on £62,500. The forward and the futures prices both increase to 1.6040 at the end...
A foreign exchange trader working for a bank enters into a long forward contract to buy...
A foreign exchange trader working for a bank enters into a long forward contract to buy one million pounds sterling at an exchange rate of 1.6000 in three months. At the same time, another trader on the next desk takes a long position in 16 three-month futures contracts on sterling. The futures price is 1.6000 and each contract is on 62,500 pounds. Within minutes of the trades being executed the forward and the futures prices both increase to 1.6040. Both...
Suppose that you’re a FX trader for a bank in New York. You are faced with...
Suppose that you’re a FX trader for a bank in New York. You are faced with the following market rates: Spot exchange rate: Sfr 0.9525/$. In other words, 1 US dollar = 0.9525 Swiss francs 6 month US dollar interest rate = 0.80% per annum 6 month Swiss franc interest rate = 0.15% per annum 6 month forward exchange rate: = Sfr 0.9445/$ The maximum amount you may borrow and/or invest is $10,000,000 or its equivalent in Swiss francs. a)...
As a foreign exchange trader at U.S. Bank, one of your customers would like a Canadian...
As a foreign exchange trader at U.S. Bank, one of your customers would like a Canadian dollar (CAD) quote on euro (€). Current market rates are: Spot 30-day CAD1.2974-99/$1 22-18 €0.9215--85/$1. 12-35 a. What bid and ask cross rates would you quote on spot euro: S(CAD/€)? b. What outright CAD cross rates would you quote on 30-day forward euro: F(CAD/€) c. What is the forward premium or discount on buying 30-day € against CAD delivery?
Q a. Suppose $1.69= £1 in New York and $1.68=£1 in London. How can foreign exchange...
Q a. Suppose $1.69= £1 in New York and $1.68=£1 in London. How can foreign exchange arbitragers profit from these exchange rates? Q b. Assume that a speculator anticipates that the spot rate of the franc in three months with be higher than today’s three-month forward rate of the franc, $0.50=1 franc. How can this speculator use $1 million to speculate in the forward market? Please elaborate your answer.
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT