Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Basic Finance Expert

problem 1: Below is information about the spot and forward rates for three currencies against the US dollar (USD):

Currency (exchange rate)             Spot Rate             Six-month forward rate

Euro (EUR) (EUR/USD)                   0.84                    0.81
Japanese Yen (JPY) (JPY/USD)       122.10                 118.80
British Pound (GBP) (USD/GBP)        1.47                    1.49
 
a) Critically discuss the interest rate parity and covered interest arbitrage theories.

b) Discuss the conditions for interest rate parity theory to hold.
 
c) Use the spot exchange rates to check if interest rate parity holds or not, given the following six-month interest rates:

United States   5.60 per cent
Euro area         3.40 per cent
Japan              1.00 per cent
Britain             5.25 per cent

problem 2: You have been provided with the following information on a fixed-fixed USD-GBP currency swap, the spot exchange rate between USD and GBP, and the USD and GBP yield curves:

  • Five-year swap 5.5 per cent fixed coupon USD for 6.125 per cent fixed coupon GBP
  • Notional principal of USD 15,000,000
  • Spot exchange rate GBP 1 = USD 1.35
  • Current discount yield curves USD 2.35 per cent flat, GBP 2.00 per cent flat.

a) You wish to value the swap. What assumptions must you make to use the information that has been provided to you?

b) What is the time zero value of the swap to the GBP receiver?

c) What settlement payment will ensure fair value against the swap to both parties, and to whom must it be paid?

d) What is the implied exchange rate between USD and GBP for the interest payments made under the swap? Should you expect this rate to match the current value of the exchange rate? describe.

problem 3: You have the following limited information upon which to base your decision as to which is the better of two alternative funding arrangements: 

i) Alternative 1 is to arrange funding by using 3.25% YTM, five-year USD Eurocurrency loan with USD 10,000,000 principal value.

ii) Alternative 2 is to arrange funding by using a 1.65% YTM, five-year zero-coupon currency option bond with principal repaid in USD or AUD at USD/AUD 1.05. The premium on a five-year currency call option with strike of USD/AUD 1.05 is 0.0375 USD per AUD

a) Do Alternatives 1 and 2 provide the same value of payment at maturity? Assume that the exchange rate is
USD/AUD 1.0225 at maturity.

b) Is it better to issue USD LIBOR or to issue the currency-option bond hedged with a call option on AUD?

problem 4:

You have the following information about rates in London for Eurocurrency loans of one-year duration, the exchange rate between the USD and euros, the currency in which you want financing, and the level of financing required:
 
•  Eurodollar rates 2.15%
•  Euroeuro rates 3.75%
•  Exchange rate USD 1 = EUR 0.7035
•  The volatility (standard deviation) of the above exchange rate is 15.45% p.a.
•  You require a total of Euro 250,000,000 to fund capital investments, which is to be repaid at maturity of the loan.
 
a) Discuss the pros and cons of financing in unhedged Eurodollars instead of via Euroeuros. As you do this you must give consideration to the foreign exchange risks associated with financing in Eurodollars.

b) Provide a simple numerical ex demonstrating the potential risk from financing in Eurodollars based on the above information.

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M91376
  • Price:- $50

Guranteed 36 Hours Delivery, In Price:- $50

Have any Question? 


Related Questions in Basic Finance

Explain why interest rate swaps are more widely used than

Explain why interest rate swaps are more widely used than currency and equity swaps? Explain how swaps are similar to but different from forward contracts ? Suppose that a party engages in a swap, but before the expirati ...

Assignmentdirections answer the following questions on a

Assignment Directions: Answer the following questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using the assign ...

Consider a portfolio comprised of two securities m and n

Consider a portfolio comprised of two securities, M and N. The correlation of the returns on these securities is 0.25. And suppose that these securities have different standard deviations. Explain how different combinati ...

Emphasize receiver benefits-revise the following sentences

Emphasize receiver benefits:- Revise the following sentences to emphasize receiver benefits. a. We have been in the business of repairing sewing machines for more than 40 years. b. We need donations so that we can expand ...

1 you are trying to value zombie games inc a company

1. You are trying to value Zombie Games Inc,, a company that manufactures games for the major game systems. You have been provided the following information: · The firm generated $ 30 million as operating profit (EBIT) i ...

Suppose the call price is 1420 and the put price is 930 for

Suppose the call price is $14.20 and the put price is $9.30 for stock options where the exercise price is $100, the risk-free interest rate is 5 percent (continuously compounded), and the time to expiration is 1 year. Ex ...

Bull how is consumer debt different today than in the

• How is consumer debt different today than in the past? • What role do interest rates play in mounting consumer debt? • What are the typical interest rates applied to credit cards, mortgages, and other debt? • Many of t ...

1 explain what a case study is discuss the limitations of

1. Explain what a case study is. Discuss the limitations of case studies for the study of human behavior. 2. What is systematic observation, and what techniques are used to make observations systematic? 3. What kinds of ...

1 when a longitudinal design reveals a change in behavior

1. When a longitudinal design reveals a change in behavior over time, why can we not conclude that the change is due to development? 2. What are generational effects, and why do they sometimes create a problem in cross-s ...

Assignmentglobal stock market and exchange rate

Assignment Global Stock Market and Exchange Rate Fluctuations Financial crises have short-term and long-term effects. However, most often analysts are focused only on short-term effects. In this assignment, you will be c ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

WalMart Identification of theory and critical discussion

Drawing on the prescribed text and/or relevant academic literature, produce a paper which discusses the nature of group

Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro