Question

1. Dr. Chong, a citizen of Singapore, traveled to Singapore from the United States recently and is quarantined in a 4-star hotel at government expense. The hotel charges SGD 300 per night (with breakfast). Aiden expects to be quarantined for 14 days. What is the cost to the government of the two-week hotel stay in U.S. dollars?
2. Given the following prices, calculate the price of pounds in dollars (how many dollars it takes to buy a pound): $1.08374/€, €1.14212/£         
3. Assume the following: Spot rate ¥110/$ and one-year interest rates in Japan and the U.S. are 2% and 4%, respectively. What is the expected exchange rate in a year?
4. You are trying to decide whether to invest in the U.S. or Switzerland for the next 3 months. The spot rate is $.6667/CHF, the 90-day forward is $.6756/CHF, and the annualized rates on the U.S. T-bill and Swiss government 3 month bonds are 10% and 4.5333%. Is it better to invest in the U.S. or Switzerland?

Answer 1

1) Amt of hotel stay in US Dollars for 14 days
Exchange rate is not given in the question. Rate as on 21st June is as follows:
1.40 SGD per USD
Hence, cost in US dollars = (300 x 14 )/1.40 = USD 3,000
2) Calculate the price of pound in dollars
1 pound = 1.14212 Euros
Since, 1 Euro = 1.08374 Dollars,
1.14212 euros will give - 1.08374 x 1.14212 = $1.23776
Hence, it will take $1.123776 to buy 1 pund
3) Expected exchange rate of Yen/US Dollars in a year
As per spot rate - 1 US Dollars = 110 Yen
1 year interest rate in Japan = 2%
1 year interest rate in US = 4%
Higher interest rate results in appreciation of the currency, since it attracts more investments
Hence, USD will appreciate in relation to Yen
Expected exchange rate can be derived as follows
Yen * (1 + Interest rate)/USD * (1 + interest rate)
=(110*(1+0.02))/(1*(1+0.04))
107.8846154
Hence, Yen/USD rate expected after one year = 107.88462
4)
Borrow in CHF for 4.5333%
For instance, borrow CHF 100,000
CHF 100,000 will give USD 1,49,992.5004 (100,000/0.6667)
Invest USD 1,49,992.5004 in USD for 90 days at 10%
The interest will be = 1,49,992.5004 * 10% * (90/365) = 3,698.445
Amount in USD after 90 days = 1,49,992.5004 + 3,698.445 = USD 1,53,690.945
Convert the above amount into CHF at the 90 day forward rate :
=1,53,690.945 *0.6756 = 1,03,833.6027
Return the CHF loan borrowed at 4.5333%
Amount = 100,000 + (100,000*4.5333%*(90/365) = 1,01,117.8
Gains = 1,03,833.6027 - 1,01,117.8 = CHF 2,715.8027 per CHF 100,000