1. A currency trader observes that in the spot exchange market, one US dollar can be exchanged for 130.99 Japanese yen or for 1.3395 Swiss francs. How many Swiss francs would you receive for every yen exchanged? (Answer to three decimal places)
2. If the starting amount is US$1,750,000, what is the Arbitrage profit which is generated if the exchange rate is ¥95.765/US$ and US$1.7542/£ and observed rate of ¥175/£,
3. Toyota builds a new car in Japan for a cost plus profit of 1,950,000 yen. At an exchange rate of 134.Y:$1 the car sells for $14,552.24 in Indianapolis. If the dollar rises in value, against the yen, to an exchange rate of 145Y:$1, what will be the price of the car?
4. Suppose a Voltswagen costs $26,350 in Baltimore and €21,675 in Frankfurt, what is the implied exchange rate between the USD and the Euro?
5. Smartjet Airlines is based in the Caribbean island nation of Trinidad and Tobago. It flies regularly from Piarco International Airport, Port of Spain to JFK Airport, New York on a regular basis. Its typical fare is US$400 per passenger for a return ticket in the economy class and the average number of passengers on a given flight is about 300. The spot exchange rate is TT$6.33/US$ and is likely to be around TT$6.28/US$ in the coming month.
a) What type of risk exposure is faced by Smartjet Airlines per flight?
b) Assuming that foreign currency forwards are traded in T&T, can this exposure be hedged if a forward contract at TT$6.30/US$ is available. Demonstrate through your calculations. If the spot rate moved to TT$6.35/US$, what would happen?
6. Investors seldom trade the stock itself, rather they trade options instead. Comment on this statement and discuss the key roles of options for the investor.
7. What are the prices of a call option and put option with the following characteristics:
Stock price = $70
Exercise Price = $68
Risk-free rate =6% per year compounded continuously
Standard deviation = 41% per year
Time of expiration = 3 months