Assume that the current spot rate is $1.0850/â¬ and the 3-month forward rate is $1.1100/â¬. Do all calculations for this problem for a three-month period, and you do not have to annualize. a. Does the foreign exchange market expect the Euro to appreciate or depreciate over the next three months? Explain why in an essay. You donât need to calculate or report the forward discount of premium for this part. b. Is the Euro selling at a 3-month forward discount or forward premium? Calculate and report the three-month forward premium (%) or discount (%) for the Euro, quoted to two decimals places (e.g. 3.85%). c. Suppose you expect the Euro to appreciate by 2.75% over the next three months and you want to speculate. What will the spot rate be in 3 months if you are correct? Should you take a long or short position on the 3-month Euro? Explain why in an essay. d. Using Word preferably, draw a fully labeled forward contract payoff diagram like on p. 131 in the textbook, but showing your position only (not the other side). If you go short, show only the short position. If you go long, show only the long position. Using Word: Click Insert at the top, then select Shapes and then Lines. e. If you are correct and you take a speculative position with â¬1,000,000, did you make or lose money? How much? Calculate your total profit or loss in USD. f. Suppose the Euro appreciates by 1.35% over the next three months. What will the spot rate be in 3 months? Will you make or lose money? How much? Calculate your total profit or loss in USD. g. Suppose now you expect the Euro to appreciate by 1.50% over the next three months and you want to speculate. What will the spot rate be in 3 months if you are correct? Should you take a long or short position on the 3-month Euro? Explain why in an essay. h. Draw a fully labeled forward contract payoff diagram like on p. 131 (preferably using Word), but showing your position only (not the other side). If you go short, show only the short position. If you go long, show only the long position. i. If you are correct and you take a position with â¬2,000,000, did you make or lose money? How much? Calculate your total profit or loss in USD. j. Suppose the Euro actually appreciates by 2.85% over the next three months. What will the spot rate be in 3 months? Will you make or lose money? How much? Calculate your total profit or loss in USD.

One-year zero coupon treasury bonds are selling for Â£975.61 in the U.K. and for $963.86 in the U.S. Assume $1,000 face value in dollars for the U.S. bond and Â£1,000 face value for the U.K bond, and round interest rates to two decimal places, e.g. 2.50%. The current spot ex-rate is $1.5350/Â£. Use THIS IRP formula: ius â iuk +/- %CHG in Â£. Use this formula (F â S) / S to calculate the forward discount/premium (or the %CHG function on your calculator). a. Using a time value of money calculation, calculate the one-year yields (YTM) in the U.S. and in the U.K. for T-bills (round to 2 decimal place, e.g. 3.45%). b. If interest rate parity (IRP) is holding, should the British pound be selling at a forward discount or premium? How much and why? Explain in an essay with full sentences. (Use the IRP formula above.) c. Based on your answer in part b, and using the current spot ex-rate, calculate and report the expected one year forward ex-rate if interest rate parity holds. (Note: You donât need the IRP equation to answer this question.) d. If interest rate parity does not hold and the actual one-year forward rate is $1.5657/Â£, calculate and report the actual forward discount or premium for the pound (to 2 decimal places). Using that forward discount or premium and the one-year yields from part a, compare an American investorâs rate of return in the U.S. versus the effective dollar return in the U.K. For the U.K. investment, assume the US investor would use a forward contract to cover ex-rate risk, and use the formula: Effective Dollar Return in UK = Interest Rate in UK +/- Forward Discount (%) or Premium (%) for the Â£. e. Starting with either $1M or Â£1M, calculate and report the covered interest arbitrage profit you could make (express the arbitrage profit in both pounds and dollars in one year, using the one-year forward ex-rate). Explain each transaction in words. f. Based on your answers to part d and e, explain what would happen to interest rates and bond prices in the U.K. and explain why that would happen in an essay. What would happen to interest rates and bond prices in the U.S. and why would that happen?

Weekly leaderboard

Home

Homework Help 3,900,000

Finance 370,000