Question

In: Finance

Hakan Yorulmaz speculates on the currencies in the foreign currency exchange market. Currently the spot price...

Hakan Yorulmaz speculates on the currencies in the foreign currency exchange market. Currently the spot price for the Danish krona is Dk159.87/$ and the 3-month forward rate is Dk 158.53/$. Hakan thinks the Danish krona will move to Dk 158.00/$ in the next three months.
What should Hakan do? If Hakan has $100.000. explain how much he can earn as profit? Show calculations. Specify the transaction such as buy sell at forward' spot expected future spot rate. (15 pts)

Expert Solution

Spot rate = Dk159.87/$

3 month forward rate = Dk158.53/$

3 month expected spot rate = Dk158/$

Amount available = $100,000

Strategy 1: Sell the forward for $

a. Sell the forward contract for $100,000 at the rate of DK 158.53/$

b. At the end of 3 months, he will sell $100,000 at the forward rate of DK 158.53/$ for DK 15,853,000 ($100,000*DK 158.53/$)

c. He will again buy $ by converting DK 15,853,000 at the expected 3 month spot rate of DK158/$ to get $100.335.44 (DK 15,853,000/158)

d. Thus, the profit made is $335.44 ($100,335.44-$100,000)

Strategy 2: Sell $ at the spot rate and buy $ at the expected spot rate after 3 months

a. Sell the $100,000 at the spot rate of DK 159.87/$ to get DK 15,987,000

b. At the end of 3 months, he will sell DK 15,987,000 to buy $ at the expected spot rate of DK 158/$ for $ 101,183.54 (DK 15,987,000/DK 158/$)

c. Thus, the profit made is $1,183.54 ($101,183.54-$100,000)

Strategy 3: Sell $ at the spot rate and buy $ at the forward rate after 3 months

a. Sell the $100,000 at the spot rate of DK 159.87/$ to get DK 15,987,000

b. Buy future contract to buy USD at forward rate of DK158.53/$

c. After 3 months, buy USD by converting DK 15,987,000 at DK158.53/$ for $100,845.27 (DK 15,987,000/DK158.53/$)

d. Thus, the profit made is $845.27 ($100,845.27-$100,000)

Of the 3 strategies, strategy 2 provides the highest profit. Hence he should sell the $ at current spot rate and buy back the $ at the spot rate expected after 3 months.

Note:

a. Assumed buy and sell rates are same

b. Impact of interest on holding the currency not considered

jeff jeffy answered 1 year ago

Use the Market for Loanable Funds, Net Foreign Investment and the Market for Foreign Currency Exchange...

Use the Market for Loanable Funds, Net Foreign Investment and the Market for Foreign Currency Exchange diagrams combined, to examine the impact of a removal of import tariff on each market. In your answer make sure that you fully explain the impact in each market and that you comment on the impact on each of the following variables: 1)private saving 2)public saving 3)national saving 4)investment 5)net foreign investment 6)exchange rate 7)net exports

Consider the prices of a U.S. dollar in the following currencies in a foreign-exchange market: Australian...

Consider the prices of a U.S. dollar in the following currencies in a foreign-exchange market: Australian dollar (A$) = 1.35 and Swiss franc (CHF) = 0.90. i) What characteristics does a foreign-exchange market possess? Name any two. ii) What is the price of a Swiss franc in Australian dollars? iii) Consider an Australian investor who is deciding between investing domestically (i.e. within Australia) or in Switzerland. The investor is only interested in the return his investment will yield in 12-months....

4. Consider the prices of a U.S. dollar in the following currencies in a foreign-exchange market:...

4. Consider the prices of a U.S. dollar in the following currencies in a foreign-exchange market: Australian dollar (A$) = 1.35 and Swiss franc (CHF) = 0.90. i) What characteristics does a foreign-exchange market possess? Name any two. ii) What is the price of a Swiss franc in Australian dollars? iii) Consider an Australian investor who is deciding between investing domestically (i.e.within Australia) or in Switzerland. The investor is only interested in the return his investment will yield in 12-months....

If the supply of dollars in the market for foreign-currency exchange shifts left, then the exchange rate

If the supply of dollars in the market for foreign-currency exchange shifts left, then the exchange rate rises and the quantity of dollars exchanged falls. rises and the quantity of dollars exchanged does not change. rises and the quantity of dollars exchanged rises. falls and the quantity of dollars exchanged does not change. If a country has a trade deficit It has positive net exports and positive net capital outflow. It has positive net exports and negative net capital...

Given a currency pair, what happens to the exchange rate if the foreign exchange market is...

Given a currency pair, what happens to the exchange rate if the foreign exchange market is in disequilibrium? Does it matter if the exchange rate is above or below the equilibrium rate? Understand what market forces drive the exchange rate back to equilibrium in both cases, whether or not the cases are different.

The spot price for foreign currency in Australia is $0.6873/A$. The three month forward rate is...

The spot price for foreign currency in Australia is $0.6873/A$. The three month forward rate is $0.7117/A$. The three month interest rate for risk-free bonds is 8.5% p.a. in Australia and 5.5% p.a. in the U.S. Using the above rates, can you engage in a covered interest rate arbitrage as an American investor? Use either $100,000 or A$100,000 as the notational amount.

Discuss the importance of the market for loanable funds and the market for foreign-currency exchange economic...

Discuss the importance of the market for loanable funds and the market for foreign-currency exchange economic growth.

PART A: U.S. and Canada's currencies pesos and dollar, being traded in the foreign exchange market....

PART A: U.S. and Canada's currencies pesos and dollar, being traded in the foreign exchange market. If nothing changes, explain how value of pesos may change (appreciate or depreciate) due to the following two events. a) Interest rates are higher in Canada than they are in the U.S. b) GDP grows faster in the U.S. than they do in Canada. PART B: Bank Z has a total deposit of $2,600 million. Required reserve ration is set at 4%. a. How...

The foreign exchange market is in equilibrium when deposits of all currencies offer the same expected...

The foreign exchange market is in equilibrium when deposits of all currencies offer the same expected rate of return. The condition that the expected returns on deposits of any two currencies are equal when measured in the same currency is called the interest parity condition. Consider the following two currencies, the dollar ($) and the euro (€). Let R$ and R€ represent the interest rates on dollar deposits and euro deposits respectively and let E$/€ represent the current exchange rate...

1) The foreign exchange market is in equilibrium when deposits of all currencies offer the same...

1) The foreign exchange market is in equilibrium when deposits of all currencies offer the same expected rate of return. The condition that the expected returns on deposits of any two currencies are equal when measured in the same currency is called the interest parity condition. Consider the following two currencies, the dollar ($) and the euro (€). Let R$ and R€ represent the interest rates on dollar deposits and euro deposits respectively and let E$/€ represent the current exchange...