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26 Nov 2019

4. An investor wishes to buy euros spot (at $0.9080) and sell euros forward for 180 days (at $0.9146).

a. What is the swap rate on euros?

b. What is the forward premium or discount on 180-day euros?


7. Suppose the euro is quoted at 0.7064

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Assume that a bank has assets located in the EU worth 101 million euros, on which it earns an average of 5% per year. The spot exchange rate is $ 0.76 euros/$. (a) If the exchange rate at the end of the year is $0.79 euros/dollar, will the dollar have appreciated or depreciated against the euro ? b. Given the change in the exchange rate, what is the effect in dollars on the net interest income from foreign assets and liabilities ?

Coleman needs 100,000 euros in 1 year, then it could convert dollars to euros and deposit the euros in a bank today.The Coleman purchasing team received this price quote of €100,000 today where the current spot rate was $1.1800/€, which equates to the U.S. dollar price of $118,000.
Coleman's director of finance now wondered if the firm should hedge against more fluctuation in the exchange rate.
Three approaches were possible:
1) Hedge in the forward market. The 1-year forward exchange quote was $1.20/€.
2) Hedge in the money market. Coleman could borrow U.S. dollars from its U.S. bank at 7.00% per annum. The EU investment rate is 9.00% per annum.
3) Hedge with foreign currency options. The day the Euros are needed the call options at $1.2000/€ could be purchased for a premium of $0.03. (Note: First you need to figure out the option premium in percentage. The spreadsheet cell D32 is not set-up for USD)
Discuss if Coleman should hedge its transaction exposure of EUR 100,000. If you recommend that the company should hedge, which of the hedging alternatives would better serve Northwind shareholders?

Assumptions Value
1-year A/P in € ?
Spot rate, ($/€) ?
1-year forward rate, ($/€) ?
EU investment rate ?
borrowing rate, USD, per annum ?
Coleman's WACC 10.000%
Time to maturity (in months) 12.00
Options on Euro: 1-year Strike price, ($/€) Call Option
Strike price ($/£) ?

Option premium ?

Solve this using step by step calculations

7. Assume that today is January 1, U.S. $1.00 = .90 euros, and the interest rate on dollar deposits is 3%. If in one year: 1. the dollar appreciates relative to the euro by 10%, what will be the return on dollar deposits in terms of euros? 2. the dollar depreciates relative to the euro by 20%, what will be the return on dollar deposits in terms of euros? 3. the expected exchange rate is U.S. $1.00 = .95 euros, what is the expected rate of depreciation for the dollar? 4. the dollar is expected to appreciate 5%, what interest rate on euro deposits is required if the concepts of interest-rate parity and capital mobility are to hold?

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