Ask Financial Management Expert

Exchange rates are: SFR1.8622/$ spot SFR1.8000/$ one year forward Interest rates are: 6 percent per annum in Switzerland 9 percent per annum in the United States You have no money, but your credit is good for a loan of $10,000 or its equivalent in Swiss francs. You can borrow or invest dollars for one year at 9 percent, and you can borrow or invest francs for one year at 6 percent. You notice that U.S. interest rates are above Swiss rates, and you would like to earn excess profits with no risk. What can you do, and how much can you earn?

• Maria Cadiz, a foreign exchange trader in Madrid, sees that the 180-day forward rate for the Japanese yen against the dollar is ¥130/$. She believes that the spot yen in six months will be stronger, at ¥125/$. What would be her expected profit on a 180-day forward speculation with $1 million? What would be her risks?

• Laura Wong would like to speculate that the U.S. dollar is going to weaken compared to the Swiss franc (SFR). She intends to use foreign currency options. She finds an options contract for the SFR62,500 (she can only afford to speculate on one contract). The most recent spot rate is $0.6400/SFR. The three-month forward rate is $0.6500/SFR. The premium for a put option on SFR for three months with a strike price of $0.6400/SFR (“at the money”) is 1.0 cent per SFR. The premium for a three-month call option on SFR is 2.0 cents per SFR for the same strike price. Laura believes that the most likely range for the spot SFR in three months will be a low of $0.6000/SFR and a high of $0.6800/SFR. The most likely value, in her opinion, will be $0.6700/SFR. Ignore brokerage costs.

• Diagram the profit and loss position from Laura Wong’s perspective for both the put and the call options.

• Calculate what she would gain or lose at her expected range of future spot prices and her most likely estimate of $0.6700/SFR.

• Calculate and show on the diagram the breakeven future spot rate for the SFR.

• Which strategy is most likely to lead to a speculative profit for Laura?

Financial Management, Finance

  • Category:- Financial Management
  • Reference No.:- M92813929

Have any Question?


Related Questions in Financial Management

Assignment problems1 on the day harry was born his parents

Assignment Problems 1. On the day Harry was born, his parents put $1600 into an investment account that promises to pay a fixed interest rate of 5 percent per year. How much money will Harry have in this account when he ...

1 activities of a company that require the spending of cash

1) Activities of a company that require the spending of cash are known as: A) Uses of cash. B) Cash on hand. C) Cash receipts. D) Sources of cash. E) Cash collections. 2) Relationships determined from a firm's financial ...

Module discussion forumto prepare for this discussion

Module : Discussion Forum To prepare for this discussion, review "Basics of Speechwriting" and "Basics of Giving a Speech" in textbook Chapter 15. Then watch this video of Apple founder and CEO Steve Jobs giving the 2005 ...

Launching a new product linefor this portfolio project

Launching a New Product Line For this Portfolio Project Option, you will act as an employee in a large company that develops and distributes men's and women's personal care products. The company has developed a new produ ...

Question 1 discuss valuing bonds and how interest rates

Question : 1) Discuss valuing bonds and how interest rates affect their value. Also consider the importance of the yield-to-maturity (YTM). 2) Discuss common stocks and preferred stocks. Also, which common stock valuatio ...

Introductionlast week you determined the root causes of the

Introduction Last week, you determined the root cause(s) of the problem you are trying to resolve for your final paper. As a reminder, the decision you are working on is the one that you selected in week two. This week, ...

You have owned and operated a successful brick-and-mortar

You have owned and operated a successful brick-and-mortar business for several years. Due to increased competition from other retailers, you have decided to expand your operations to sell your products via the Internet. ...

You will be conducting an interview with a market research

You will be conducting an interview with a market research professional or a company representative. Use the results of your research to make specific recommendations on how market research can be applied to the Marketpl ...

Question 1 what is marketing research what are the two

Question 1: What is marketing research? What are the two primary types of research? Question 2: What factors influence marketing research? Question 3: The role of statistics in business decision-making? Assignment : Sele ...

Chapter 74 for commercial banks what is meant by a managed

Chapter 7 4. For commercial banks, what is meant by a managed liability? What role do liquid assets play on the balance sheet of commercial banks? What role do money market instruments play in the asset and liability man ...

  • 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

Why might a bank avoid the use of interest rate swaps even

Why might a bank avoid the use of interest rate swaps, even when the institution is exposed to significant interest rate

Describe the difference between zero coupon bonds and

Describe the difference between zero coupon bonds and coupon bonds. Under what conditions will a coupon bond sell at a p

Compute the present value of an annuity of 880 per year

Compute the present value of an annuity of $ 880 per year for 16 years, given a discount rate of 6 percent per annum. As

Compute the present value of an 1150 payment made in ten

Compute the present value of an $1,150 payment made in ten years when the discount rate is 12 percent. (Do not round int

Compute the present value of an annuity of 699 per year

Compute the present value of an annuity of $ 699 per year for 19 years, given a discount rate of 6 percent per annum. As