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Use currency derivatives to speculate or hedge in the foreign exchange market to solve the following problems:

Problem 1:

An investor wishes to buy euros spot (at $0.9080) and sell euros forward for 180 days (at $0.9146).

a. What is the swap rate on euros?

b. What is the forward premium or discount on 180-day euros?

Problem 2:

Suppose the euro is quoted at 0.7064-80 in London and the pound sterling is quoted at 1.6244-59 in Frankfurt.

a. Is there a profitable arbitrage situation? Describe it.

b. Compute the percentage bid-ask spreads on the pound and euro.

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Basic Finance, Finance

Category:- Basic Finance
Reference No.:- M9397335

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