Bank of Oklahoma has the capacity to borrow 20 million in Canadian dollars (C$) or 10 million in U.S. dollars ($). The bank believes that the C$ will appreciate over the next 10 days from $.35 to $.37.

U.S. $
Lending Rate: 7.50%
Borrowing Rate: 8.00%

C$
Lending Rate: 7.20%
Borrowing Rate: 7.60%

Assuming the forecast is correct, what will be its U.S. $ profit from currency speculation over the 10 day period?

30. BE SURE TO SHOW AND LABEL ALL COMPUTATIONS BELOW. ALSO, BE SURE TO PROVIDE THE UNIT OF MEASURE OF THE ANSWER ($, EUROS, % ETC). FAILURE TO DO SO WILL RESULT IN A DEDUCTION OF POINTS. 6 POINTS POSSIBLE

An American company has a 100,000 Mexican peso receivable. The company has purchased a currency put option to hedge the receivable. The premium is $.02 and the exercise price is $.80. The spot rate of the peso at the time that the option matures is $.87.

A. Will the company exercise the option, assuming it acts in a normal profit-seeking manner?


B. What will be the net amount that the company receives or pays out depending on whether it exercises the option?

31. BE SURE TO SHOW AND LABEL ALL COMPUTATIONS BELOW. ALSO, BE SURE TO PROVIDE THE UNIT OF MEASURE OF THE ANSWER ($, EUROS, % ETC). FAILURE TO DO SO WILL RESULT IN A DEDUCTION OF POINTS. 6 POINTS POSSIBLE

The inflation rate in the United States is expected to be 3 percent over the next year, while the Canadian inflation rate is expected to be 2 percent. The current spot rate of the Canadian $ is $1.03. Using purchasing power parity, the expected spot rate at the end of one year is $_______.


32. BE SURE TO SHOW AND LABEL ALL COMPUTATIONS BELOW. ALSO, BE SURE TO PROVIDE THE UNIT OF MEASURE OF THE ANSWER ($, EUROS, % ETC). FAILURE TO DO SO WILL RESULT IN A DEDUCTION OF POINTS. 6 POINTS POSSIBLE

For the Singapore $ (S$) the bid rate is $.34 and the ask rate is $.345 at Bank A. At Bank B, the bid
rate is $.33 and the ask rate is $.335. What will be your profit if you have $2,000,000 to invest and
execute locational arbitrage?

33. BE SURE TO SHOW AND LABEL ALL COMPUTATIONS BELOW. ALSO, BE SURE TO PROVIDE THE UNIT OF MEASURE OF THE ANSWER ($, EUROS, % ETC). FAILURE TO DO SO WILL RESULT IN A DEDUCTION OF POINTS. 6 POINTS POSSIBLE

Facts:
$2,000,000 available for investment
Spot rate today of Swiss franc = $.60
Expected spot rate 1 year from now = $.64
1-year forward rate as of today for Swiss franc = $.63
Rate on 1-year deposits denominated in Swiss francs = 5%
Rate on 1-year deposits denominated in U.S. dollars = 7%

What rate of return will a U.S. investor earn using covered interest arbitrage?

34. BE SURE TO SHOW AND LABEL ALL COMPUTATIONS BELOW. ALSO, BE SURE TO PROVIDE THE UNIT OF MEASURE OF THE ANSWER ($, EUROS, % ETC). FAILURE TO DO SO WILL RESULT IN A DEDUCTION OF POINTS. 6 POINTS POSSIBLE

Assume interest rate parity exists. The U.S. 5-year interest rate is 6% annualized and the Burundian
5-year interest rate is 9% annualized. The spot rate today on the Burundian franc is $.40. If the 5-year
forward rate of the franc is used as the basis for the forecast, what is the approximate 5-year forecast
of the franc's spot rate?


35. BE SURE TO SHOW AND LABEL ALL COMPUTATIONS BELOW. ALSO, BE SURE TO PROVIDE THE UNIT OF MEASURE OF THE ANSWER ($, EUROS, % ETC). FAILURE TO DO SO WILL RESULT IN A DEDUCTION OF POINTS. 6 POINTS POSSIBLE

You expect to receive 10,000,000 Guinean francs 90 days from now. You hedge your position by selling the franc forward. The current spot rate of the franc is $.0090 and the forward rate is $.0096. In 90 days, you expect the spot rate to be $.0091. How many U.S. dollars will you receive for the 10,000,000 francs 90 days from now, assuming your forecast is correct?


36. BE SURE TO SHOW AND LABEL ALL COMPUTATIONS BELOW. ALSO, BE SURE TO PROVIDE THE UNIT OF MEASURE OF THE ANSWER ($, EUROS, % ETC). FAILURE TO DO SO WILL RESULT IN A DEDUCTION OF POINTS. 6 POINTS POSSIBLE

You believe the forward rate is accurate in forecasting the spot rate. The forward rate of the Gibralter pound contains a 7% discount. The spot rate today is $.85. You estimate the spot rate one year ahead for the pound will be ______.


37. BE SURE TO SHOW AND LABEL ALL COMPUTATIONS BELOW. ALSO, BE SURE TO PROVIDE THE UNIT OF MEASURE OF THE ANSWER ($, EUROS, % ETC). FAILURE TO DO SO WILL RESULT IN A DEDUCTION OF POINTS. 6 POINTS POSSIBLE

A company's Subsidiary A has net inflows of 1,000,000 Indian rupees while subsidiary B has net outflows of 2,000,000 Indian rupees. The exchange rate of the Indian rupee is $.60. What is the net inflow or outflow in U.S. dollars?

38. BE SURE TO SHOW AND LABEL ALL COMPUTATIONS BELOW. ALSO, BE SURE TO PROVIDE THE UNIT OF MEASURE OF THE ANSWER ($, EUROS, % ETC). FAILURE TO DO SO WILL RESULT IN A DEDUCTION OF POINTS. 6 POINTS POSSIBLE

Facts:
U.S. $ lending rate = 6.70%
U.S. $ borrowing rate = 7.20%
Canadian $ lending rate = 6.90%
Canadian $ borrowing rate = 7.30%


Chase Bank can either borrow U.S. $10 million or 20 million in Canadian $ (C$). The current spot rate for the C$ is $1.12. Chase Bank expects the spot rate of the Canadian $ to be $1.10 in 120 days. What is Chase Bank's profit from speculation if the spot rate of the C$ is $1.10 in 120 days?

39. BE SURE TO SHOW AND LABEL ALL COMPUTATIONS BELOW. ALSO, BE SURE TO PROVIDE THE UNIT OF MEASURE OF THE ANSWER ($, EUROS, % ETC). FAILURE TO DO SO WILL RESULT IN A DEDUCTION OF POINTS. 6 POINTS POSSIBLE

Facts:
U.S. investors have $1,000,000 to invest
1-year deposit rate offered on U.S. dollars = 13%
1-year deposit rate offered on Bahamian dollars = 11%
1-year forward rate of Bahamian dollars = $.512
Spot rate of Bahamian dollar = $.500


A. Does interest rate parity exist? Justify your answer.
B. Can covered interest arbitrage be used to the investors to earn a yield above that possible domestically? Justify your answer.
40. BE SURE TO SHOW AND LABEL ALL COMPUTATIONS BELOW. ALSO, BE SURE TO PROVIDE THE UNIT OF MEASURE OF THE ANSWER ($, EUROS, % ETC). FAILURE TO DO SO WILL RESULT IN A DEDUCTION OF POINTS. 6 POINTS POSSIBLE

U.S. Company X wants to hedge 10.0 million pesos in accounts receivable from a Mexican firm with an option. The exercise price of the option is $.50 while the premium is $.04. What is the total amount of U.S. $ to be received upon exercising the option (taking into account the premium paid)?