Author: Anonymous

Suppose you observe the following exchange rates: S($/£) = 1.3. The one-year forward rate is F1($/£) = 1.32. The risk-free interest rate in the U.S. is 5% and in UK it is 2%. You can borrow either $1,300,000 or £1,000,000. Which of the following strategy you will make a profit? 

Transaction Exposure Problem: Suppose that you (i.e., company XYZ) are a US-based importer of goods from Canada. You expect the value of the Canada dollar to increase against the US dollar over the next 6 months. You will be making payment on a shipment of imported goods (CAD100,000) in 6 months and want to hedge your currency exposure. The US risk-free rate is 5% and the Canada risk-free rate is 4% per year. The current spot rate is $1.25/CAD, and the 6-month forward rate is $1.3/CAD. You can also buy a 6-month option on Canadian dollars at the strike price of $1.4 /CAD for a premium of $0.10/CAD. If XYZ hedges the exposure using an option hedge, total option premium: $ [l1] will be paid today. The option premium will grow to $ [l2]   in six months at the US interest rate. In six months, if the spot price is $1.3 per CAD, the option is [l3] (in/out) of the money. So, XYZ will buy 100,000 CAD at the price of $ [l4] per CAD, which equals to a total cost of $ [l5] . After the option premium, the total (net) dollar costs in six month is $ [l6] .

I pledge that I have neither given nor received aid on this exam (no grade will be given if not answering this question).

In conversation, Interbank FX trades use a shorthand abbreviation in expressing spot currency quotations. Consider a $/£ bid-ask quote of $1.5170-$1.5184. The “big figure”, assumed to be known to all traders is:

Country in US$   Bid Ask Swiss Franc (CHF) 0.7648 0.7652 Euro (€) 1.4000 1.4200   What are the cross-exchange rates for Swiss Francs priced in euro (€/CHF)? Please leave 4 decimal points for your answer. Bid: € [l1] /CHF Ask: € [l2] /CHF

  Assume the six-month European call option has a striking price of $0.95/CHF. Assume the option premium is $0.02/CHF. If at the due date, the value of the Swiss Franc has decreased to $0.90/CHF. The option should ______. The net profit/loss of the buyer is _______.

  Suppose that the annual interest rate is 6 percent in the United States and 4 percent in Great Britain, and that the spot exchange rate is $2/£ and the forward exchange rate, with 6-month maturity, is $2.3/£. Assume that an arbitrager can borrow up to $10,000 or £5,000.   Step 4: Suppose you can borrow either $10,000 or £5,000. Please fill out the blanks below for both trading options and decide which option will make profit.  Option A:   1)      Borrow $10,000 today, your repayment in 6 months will be $ [l2] .   2)      Exchange into £5,000 today at the current spot rate.   3)      Invest £5,000 in UK for 6 months, and you will receive £ [l3] (principal plus interest) in 6 months.   4)      Sell forward £ (the future value of your pound investment, which is what you get from the above step) due in 6 months to yield $ [l4] .   5)      Your arbitrage profit is $ [l5] .     Option B:   1)      Borrow £5,000 today, your repayment in 6 months will be £ [l6] .   2)      Exchange into $10,000 today at the current spot rate.   3)      Invest $10,000 in US for 6 months, and you will receive $ [l7] (principal plus interest) in 6 months.   4)      Buy forward £ (the future value of your pound loan, which is what you get from the first step) due in 6 months. The cost will be $ [l8] .   5)      Your arbitrage profit is $ [l9] . You will choose option [l1] (Please insert A or B) based on the above calculations.  

  Questions are based on the following information: UA purchased an aircraft from Airbus and was billed €30 million payable in one year. UA is concerned with the USD costs from international sales and would like to control exchange risk. The current spot exchange rate is $1.05/€ and one-year forward exchange rate is $1.10/€ at the moment. UA can buy a one-year option on euro with a strike price of $1.12/€ for a premium of $0.02 per euro. Currently, the annual interest rate is 5% in the euro zone and 6% in the U.S.  

A British firm offers a French customer the choice of paying a £10,000 bill due in 90 days with either £10,000 or €12,500. The value of this free option is _______.

SHORT ANSWER :SA3: Answer in two-four sentences: Wang [last name] Chia-Hao emigrated to the United States to attend college in New Jersey and began calling himself Charles Wang and upon graduation, decided to accept a job offer at Google.  When Wang Chia-Hao retired, he liked to tell people he had lived in three different cultures: China, New Jersey, and Google. Use Wang’s experience to explain the difference between acculturation & assimilation. For an extra point, can you find a clue to his enculturation within the details of this scenario?