In October 2013, there is a consensus in the capital marke…

  In October 2013, there is a consensus in the capital market that the annual inflation rate is likely to be 3.5% in US and -1.5% in China for the next two years. The spot exchange rate in October 2013 is CNY6.10/$. Based on this information, answer the following questions regarding your prediction on the foreign exchange rate. Using the exact version of parity relationships, the forward rate in October 2015 (two years from 2013) is CNY [l1] /$. (Please use indirect quote and leave 2 decimal points) (2 points)

Suppose you observe the following exchange rates: S($/£) = 1…

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., compan…

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] .