International Finance
Autor: Joshua • January 2, 2018 • 890 Words (4 Pages) • 583 Views
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HKD/CAD=HKD/USD*USD/CAD. Since HKD/USD is constant and USD/CAD decreases, HKD/CAD will decrease as a result. CAD will depreciate against HKD.
4.
Based on the EUR/USD and SF/USD rates, EUR/SF should be equal to 0.7627/1.1806=0.6460.
Because UBS offers EUR/SF=0.6395, trianglar arbitrage is possible as UBS overvalues EUR. The trades can be conducted as follows
- Exchange USD for EUR at Dresdner Bank: 5MM*0.7627=€3.8135MM
- Exchange EUR for SF at UBS: 3.8135MM/0.6395=CHF 5.9633MM
- Exchange SF for USD at Credit Suisse: 5.9633MM/1.1806=$5.0511MM
- Profit is $51,100
If we use USD to exchange SF at first, we will incur a lost of $50,520. It is because that transaction will cause us to buy overvalued SF at Credit Suisse and sell at a lower value at UBS. The EUR/SF price that eliminates arbitrage is 0.6460.
5.a.
I will enter the three-month forward contract using USD to exchange
GBP and sell GBP back to USD at the spot rate after three months.
USD needed to fulfill the forward contract: 1,000,000*1.9=$1,900,000
USD obtained by selling off GBP: 1,000,000*1.93=$1,930,000
Profit earned: 1,930,000-1,900,000= $30,000
b.
If spot rate turns out to be USD/GBP=1.86,
USD obtained by selling off GBP =1,000,000*1.86=$1,860,000
Loss incurred=1,900,000-1,860,000= $40,000
Alternatively for both a and b
Just sell £1MM to exchange USD at the spot rate (USD/GBP=1.95).
Amount of USD obtained=$1.95MM, then enter the forward contract.
Profit earned=1.95MM/1.9-1MM= £26,316
6.
[pic 3]
Because the actual forward rate EUR/USD=0.99, so the forward rate undervalue USD, the treasurer should invest the money in Germany. The steps are as follows.
- Exchange USD to EUR=100MM*1.01=€101MM
- Invest in Germany and entered into forward contract to change back to USD after 6 months
- Amount of EUR will obtain=101MM*(1+7%*0.5)= €104.535MM
- Amount of USD can obtain from forward=104.535/0.99=$105.591MM
If the treasurer just invest in U.S., he will only get 100*(1+8%*0.5)=$104MM. The extra return=105.591-104=$1.591MM
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