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13 May 2018

11. Boisjoly Watch Imports has agreed to purchase 15,000 Swiss watches for $1 million francs at today's spot rate. The firm's financial manager, James D, has noted the following current spot and forward rates:

USD/ SFr SFr/USD

Spot 1.6590 0.6028

30- day forward 1.6540 0.6046

90- day forward 1.6460 0.6075

180 day forward 1.6400 0.6098

On the same day, he agrees to purchase 15,000 more watches in 3 months at the same price of 1 million Swiss francs.

1. What is the cost of the watches in USD, if purchased at today's spot rate?

2. What is the cost in dollars of the second 15,000 batch if payment is made in 90 days and the spot rate at that time equals today's 90 day forward rate?

3. If the exchange rate for is 0.50 Swiss francs per dollar in 90 days, how much will James D have to pay (in $) for the watches?

Answers 1. $1,658; 925

2. $$1,646,091

3. $2,000,000

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Jarrod Robel
Jarrod RobelLv2
15 May 2018

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PLEASE ANSWER ALL QUESTIONS!!!

Spot and forward rates

Anderson Australian Imports has agreed to purchase 15,000 cases of Australian beer for 5 million Australian dollars at today's spot rate. The firm's financial manager, Linda Wilson, has noted the following current spot and forward rates:

U.S. Dollar/Australian
Dollar		 Australian Dollar/U.S.
Dollar
Spot 1.0759 0.9295
30-day forward 1.0718 0.9330
90-day forward 1.0631 0.9406
180-day forward 0.9276 1.0781

On the same day, Wilson agrees to purchase 15,000 more cases of beer in 3 months at the same price of 5 million Australian dollars.

What is the price of the beer in U.S. dollars if it is purchased at today's spot rate? Round your answer to the nearest cent.
$

What is the cost in U.S. dollars of the second 15,000 cases if payment is made in 90 days and the spot rate at that time equals today's 90-day forward rate? Round your answer to the nearest cent.
$

If the exchange rate for the Australian dollar is 0.9123 to $1 in 90 days, how much will Wilson have to pay for the beer (in U.S. dollars)? Round your answer to the nearest cent.
$

1. James Smith is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ and the 6-month forward rate is ¥128.53/$. James thinks the yen will move to ¥128.00/$ in the next six months.

(1) If James buys $100,000 worth of yen at today's spot price his potential gain is ___________ and his potential loss is ___________.

A) $100,000; unlimited

B) unlimited; unlimited

C) $100,000; $100,000

D) unlimited; $100,000

(2) If James's expectations are correct, then he could profit in the forward market by _____________ and then _____________.

A) buying yen for ¥128.00/$; selling yen at ¥128.53/$

B) buying yen for ¥128.53/$; selling yen at ¥128.00/$

2. David Dao of United Airlines, Inc. believes the Swiss franc will appreciate versus the U.S. dollar in the coming 3-month period. He has $100,000 to invest. The current spot rate is $0.5825/SF, the 3-month forward rate is $0.5642/SF, and he expects the spot rates to reach $0.6251/SF in three months.

(1) Calculate David's expected profit assuming a pure spot market speculation strategy.

(2) Calculate David's expected profit assuming he buys (or sells) SF three months forward.

3. Jacob Singleton trades currency for Karma Capital of Geneva. Jacob has $10 million to begin with, and he must state all profits at the end of any speculation in U.S. dollars. The spot rate on the euro is $1.3358/€, while the 30-day forward rate is $1.3349/€.

(1) If Jacob believes the euro will continue to rise in value against the US dollar, so that he expects the spot rate to be $1.3600/€ at the end of 30 days, what should he do?

(2) If Jacob believes the euro will depreciate in value against the US dollar, so that he expects the spot rate to be $1.2800/€ at the end of 30 days, what should he do?

Please show all calculations!

1. If the spot rate for the Swiss Franc is that 1.05 SF is equal to 1 US $, and the annual interest rate on fixed rate one-year deposits of SF is 0.15% and for US$ is 1.5%, what is the nine-month forward rate for one dollar in terms of SFs? Assuming the same interest rates, what is the 18-month forward rate for one SF in US$s? Is this an indirect or a direct rate? If the forward rate is an accurate predictor of exchange rates, in this case will the SF get stronger or weaker against the dollar? What does this indicate about the market’s inflation expectations for Switzerland as compared to the United States economy?

2. On June 1st, 2017, Sandoz expects to ship 3 million units of a new drug from its Swiss plant to the US that it will sell through pharmacies on 270-day terms at $95 each. Therefore Sandoz will receive payment from these outlets on February 25th, 2018. Assuming that Sandoz needs to cover its expenses in Switzerland and thus wants to hedge its SF/US$ exposure using a forward contract with a Swiss bank, what is the minimum amount of Swiss Francs they should receive on February 25th, 2018 given 9-month forward rate you calculated in problem one for one US $ in terms of SF? What are two other ways Sandoz might hedge its SF/US$ exposure?

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