Problem 1 - Yen Forward

Use the following spot and forward bid-ask rates for the Japanese yen/U.S. dollar (¥/$) exchange rate from September 16, 2010, to answer the following questions:

a. What is the mid-rate for each maturity?

b. What is the annual forward premium for all maturities?

c. Which maturities have the smallest and largest forward premiums?

Problem 2 - Moscow to Tokyo

After spending a week in Moscow you get an email from your friend in Japan.  He can get you a really good deal on a plane ticket and wants you to meet him in Tokyo next week to continue your post-graduation celebratory trip.  You have 450,000 rubles left in your money pouch.  In preparation for the trip you want to exchange your Russian rubles for Japanese yen so you get the following quotes:

Spot rate on the rubles/dollar cross rate - RbI 30.96/$

Spot rate on the yen/dollar cross rate - ¥84.02/$

a. What is the Russian ruble/yen cross rate?

b. How many yen will you obtain for your rubles?

Problem 3 - Transatlantic Arbitrage

A corporate treasury working out of Vienna with operations in New York simultaneously calls Citibank in New York City and Barclays in London. The two banks give the following quotes at the same time on the euro:

Citibank NYC                               Barclays London

$0.7551-61/€                              $0.7545-75/€

Using $1 million or its euro equivalent, show how the corporate treasury could make geographic arbitrage profit with the two different exchange rate quotes.

Problem 4 - Derek Tosh and Yen-Dollar Parity

Derek Tosh is attempting to determine whether US/Japanese financial conditions are at parity. The current spot rate is a flat ¥89.00/$, while the 360-day forward rate is ¥84.90/$. Forecast inflation is 1.100% for Japan, and 5.900% for the US. The 360-day euro-yen deposit rate is 4.700%, and the 360-day euro-dollar deposit rate is 9.500%.

a. Diagram and calculate whether international parity conditions hold between Japan and the United States.

b. Find the forecasted change in the Japanese yes/U.S. dollar (¥/$) exchange rate one year from now.

Problem 5 - Copenhagen Covered (B)

Heidi Høi Jensen is now evaluating the arbitrage profit potential in the same market after interest rates change. (Note that anytime the difference in interest rates does not exactly equal the forward premium, it must be possible to make CIA profit one way or another.)

Problem 6 - Grupo Bimbo (Mexico)

Grupo Bimbo, headquartered in Mexico City, is one of the largest bakery companies in the world. On January 1st, when the spot exchange rate is Ps10.80/$,  the company borrows $25.0 million from a New York bank for one year at 6.80% interest (Mexican banks had quoted 9.60% for an equivalent loan in pesos). During the year, U.S. inflation is 2% and Mexican inflation is 4%. At the end of the year the firm repays the dollar loan.

a. If Bimbo expected the spot rate at the end of one year to be that equal to purchasing power parity, what would be the cost to Bimbo of its dollar loan in peso-denominated interest?

b. What is the real interest cost (adjusted for inflation) to Bimbo, in peso-denominated terms, of borrowing the dollars for one year, again assuming purchasing power parity?

c. If the actual spot rate at the end of the year turned out to be Ps9.60/$, what was the actual peso-denominated interest cost of the loan?

Problem 7 - Amber McClain

Amber McClain, the currency speculator we met earlier in the chapter,sells eight June futures contracts for 500,000 pesos at the closing price quoted in Exhibit 7.1.

a. What is the value of her position at maturity if the ending spot rate is $0.12000/Ps?

b. What is the value of her position at maturity if the ending spot rate is $0.09800/Ps?

c. What is the value of her position at maturity if the ending spot rate is $0.11000/Ps?

Problem 8 - Kapinsky Capital (A)

Christoph Hoffeman trades currency for Kapinsky Capital of Geneva. Christoph has $10 million to begin with, and he must state all profits at the end of any speculation in U.S. dollars. The spot rate on the euro is $1.3358/€, while the 30-day forward rate is $1.3350/€.

a. If Christoph believes the euro will continue to rise in value against the U.S. dollar, so that he expects the spot rate to be $1.3600/€ at the end of 30 days, what should he do?

b. If Christoph believes the euro will depreciate in value against the U.S. dollar, so that he expects the spot rate to be $1.2800/€ at the end of 30 days, what should he do?

INTERNET EXERCISES Question

BANK FOR INTERTNATIONAL SETTLEMENTS.

The bank for international settlements (BIS) publishes a wealth of effective exchange rate indices. Use its database and analyses to determine the degree to which the dollar, the euro, and the yen ( the " big three currencies" ) are currently overvalued or undervalued.

Attachment:- Assignment Files.rar