Question

Use this diagram for the questions that follow. Assume a trading authority of around US$1,000,000 or around HK$ 8,000,000.

Market DATA= Spot rate(US$/HK$): 0.1289

180-day forward: 0.1302

180-day US$ LIBOR: 3.00%

180-day HK$ HIBOR: 1.50%

What is the HK$ forward premium (+) or discount (-)? Use the standard number of digits in expressing the interst rate as in "7.89%

What is the US$ - HK$ interest rate differential?

During the investment horizon of 180 days you would be an owner of (US$ or HK$)

During the investment horizon of 180 days you would be an the borrower of ________. Express your answer in terms of US$ or HK$ that you would be borrowing.

At the end of the investment period you would owe, (US$ or HK$)

At the end of the investment period you would own _______ . Express your numerical answer in terms of the currency, US$ or HK$, that you would own.

At the end of the investment period, after you paid off your loan, you would have a profit of _______. Express your answer in terms of either US$ or HK$.

Answer 1

1. Annualised Forward Rate Premium or Discount( In %) = Changes in Rate * (360/180)

={(.1302-.1289)/.1289 * (360/180) *100}

= 2.02 %

2. US$ - HK$ interest rate differential = US$ Libor - HK% Hibor

=3% -1.5%

=1.5%

3. During investment horizon of 180 days I would be owner of US dollars.

4. During investment horizon of 180 days I would borrow an amount of HK$ 8000000.

5. At the end of investment period I would owe HK$ 8120000 ( HK $ 8000000 * (1+1.5% HIBOR)).

6. At the end of investment period the value of investment will be US$ 1062126

Calculations:

Convert HK$ 8000000 @ .1289 = US$ 1031200

Spot rate(US$/HK$): 0.1289

Future value of investment after 180 days = US$ 1062126 (1031200 * (1+3% LIBOR)

7. After end of investment period the profit earned after payment of loan will be HK$ 37726

Calculation = Investment Value - Loan Payable

=8157726-8120000

=HK$ 37726

Convert US$ 1062126 / .1302 = HK$ 8157726

180-day forward: 0.1302

Assumption: Used Covered Interest Rate Parity theroy.

Authos Bio: Cost & Management Accountant, Financial Analyst & Portfolio Manager