1. You observe the following exchange rate quotations: £1 is equal to $1.31 and €1 is equal to $1.19. How many euros will you need to purchase 125 million pounds?
2. The 180-day forward rate of the US dollar is quoted at JPY 79.5, and the spot rate of the US dollar is quoted at JPY 77.7. The forward is present premium (or discount) at what percent?
3. Assume the bid/ask percentage spread for Mexican peso retail transactions is 11%, if the bid rate is $.0792, what is the ask rate?
4. Baylor Bank believes the Australian Dollar will appreciate over the next six days from $1.10 to $1.12. The following annual interest rates apply:
Currency Lending Rate Borrowing Rate
US Dollars 6.80% 7.15%
Australian Dollar (AUD) 6.25% 6.85%
Baylor Bank has the capacity to borrow either AUD 10 million or $11 million. If Baylor Bank's forecast is correct, what will its dollar profit be from speculation over the six-day period (assuming it does not use any of its existing consumer deposits to capitalize on its expectations)?
5. Assume that the United States invests heavily in government and corporate securities of Country K. In addition, residents of Country K invest heavily in the United States. Approxi-mately $10 billion worth of investment transactions occur between these two countries each year. The total dollar value of trade transactions per year is about $8 million. This information is expected to also hold in the future.
Because your firm exports goods to Country K, your job as international cash manager requires you to forecast the value of Country K’s currency (the “krank”) with respect to the dollar. Explain how each of the following conditions will affect the value of the krank, holding other things equal. Then, aggregate all of these impacts to develop an overall forecast of the krank’s movement against the dollar.
a. U.S. inflation has suddenly increased substantially, while Country K’s inflation remains low.
b. Country K’s interest rates have increased substantially, while U.S. interest rates remain low. Investors of both countries are attracted to high interest rates.
c. The U.S. income level decreased substantially, while Country K’s income level has remained unchanged.
d. The U.S. is expected to impose a small tariff on goods imported from Country K.
e. Combine all expected impacts to develop an overall forecast.
6. Assume the current spot rate of the euro is $1.32 and the forward rate for the euro is $1.30, while the annualized forward discount of the euro is -3.03%. How many days is the forward contract?
7. Bulldog, Inc., has bought British pound call options at a premium of $.015 per unit, and an exercise price of $1.569 per unit. It has forecasted the Australian dollar’s lowest level over the period of concern as $1.549, $1.559, $ 1.569, $1.579 and $1.589. Determine the net profit (or loss) per unit to Bulldog, Inc., if each Australia dollar each level occurs (show detailed analysis; follow the five steps in the teaching notes).
8. Assume that a bank's ask rate on Euro is $1.1365 and bid-ask percentage spread is .5%, what is the bid price of Euro?
9. One year ago, you sold a call option on 1 million pounds with an expiration date of one year. You received a premium on the call option of $.02 per unit. The exercise price was $1.21. Assume that one year ago, the spot rate of the pound was $1.551, the one-year forward rate exhibited a premium of 4.5%, and the one-year futures price was the same as the one-year forward rate. From one year ago to today, the pound appreciated against the dollar by 3 percent. Today the call option will be exercised (if it is feasible for the buyer to do so).
a. Determine the total dollar amount of your profit or loss from your position in the call option.
b. Now assume that instead of taking a position in the call option one year ago, you sold a futures contract on 1 million pounds with a settlement date of one year. Determine the total dollar amount of your profit or loss.