Q1 Singh Designer Corporation is expecting to receive 2,000,000 Euros in 3 months. The treasury department provides the following information. You are required to furnish a recommendation as to whether Singh Corp. should:
a) Remain Unhedged
b) Hedge with Forwards
c) Set up a money market hedge
d) Hedge with options
Make sure you support your recommendation with potential payoffs attributable to each possible alternative described above.
|
Transaction Exposure Example
|
|
|
Transaction amount
|
€ 2,000,000
|
|
Spot rate $/Euro
|
1.754
|
|
90-day forward
|
1.765
|
|
Cost of capital
|
14%
|
|
Euro 3 month borrow
|
0.02
|
|
Euro 3 month investment
|
0.02
|
|
US3 month borrow
|
0.03
|
|
US 3 month investment
|
0.015
|
|
Expected spot
|
1.78
|
|
Options
|
|
|
Maturity
|
90 days
|
|
Strike price: X
|
1.65
|
|
Premium
|
1.25%
|
Q2
|
Period
|
|
Days Forward
|
|
Bid Rate
|
|
Ask Rate
|
|
spot
|
|
|
|
114.23
|
|
114.27
|
|
1 month
|
|
30
|
|
113.82
|
|
113.87
|
|
6 months
|
|
180
|
|
112.05
|
|
112.11
|
|
24 months
|
|
720
|
|
106.83
|
|
106.98
|
a. Use the following spot and forward bid-ask rates for the Japanese yen/U.S. dollar (¥/$) exchange rate to answer the following questions:
1) Calculate the mid-rates from the bid-ask rate quotes.
2) Calculate the forward premium on the different maturities using the mid-rates from part a).
b. You have SF 10,000,000. Given the information below on three different banks offered currency rates, can you make riskless profit on the Swiss francs by triangular arbitrage? Show your steps and the amount of profit.
|
Given Parameter
|
Values
|
|
Beginning funds in Swiss francs (SF)
|
10,000,000.00
|
|
Bank of Japan (yen/$)
|
120.00
|
|
Swiss Banking Corp (SF/$)
|
1.6000
|
|
Royal Bank (yen/SF)
|
80.00
|
Q3 Jason Smith is a currency trader. He has $10 million (or its Swiss franc equivalent) for a short-term money market investment. He faces the following quotes:
Arbitrage funds available $10,000,000
Spot exchange rate (SFr./$) 1.1050
3-month forward rate (SFr./$) 1.0575
U.S. dollar 3-month interest rate 5.800%
Swiss franc3-month interest rate 4.100%
Make a recommendation if he should invest in U.S. dollars for three months, or make a covered interest arbitrage investment in the Swiss franc. Show the steps and arbitrage profits payoffs.
Q4
Matt works for Currency trader. He expects that the Australian dollar (AUD) will appreciate versus the U.S. dollar over the coming 90 days. The current spot rate is $0.5750/AUD. Matthas the following options available based on the Australian dollar:
|
Current spot rate (US$/Aus dollar)
|
$0.5750
|
|
|
Days to maturity
|
90
|
|
|
|
|
|
|
Option choices on the Aus dollar:
|
Call option
|
Put option
|
|
Strike price (US$/Aus dollar)
|
$0.6000
|
$0.6000
|
|
Premium (US$/Aus dollar)
|
$0.0149
|
$0.0004
|
a) Which option should Matt buy?
b) What is Matt's breakeven price on the option purchased in part a)?
c) What is Matt's gross profit and net profit (including premium) if the ending spot rate is $0.6600/AUD?
d) What is Matt's payoff if the spot rate is $.5550/AUD.