1. Use the exchange rates in the table to answer the questions.
|
American Term
|
European Term
|
|
Swiss Franc
|
0.9036
|
1.1067
|
|
1-month forward
|
0.9052
|
1.1047
|
|
3-month forward
|
0.9077
|
1.1017
|
(a) Is Swiss Franc trading at premium or discount vs. USD in the forward market?
(b) Calculate the 1-month forward premium/discount using European Term (30 days).
(c) Suppose you long a 3-month forward contract on Swiss Franc, worth SF 1,000,000 at the above forward rate. At maturity date, you check the spot exchange rate, S(USD/SF) = 0.9125. State your profit/loss in USD from the forward transaction at maturity date.
2. Suppose the annual interest rate is 2.5% in U.S. and 1.5% in Japan., and that the spot exchange rate is S(¥/$) = 102 and the forward exchange rate with 12-month maturity is F12(¥/$) = 102.35 Assume you are a U.S. trader and can borrow up to $1,000,000 or ¥102,000,000. Answer the following questions.
(a) Is there an arbitrage opportunity according to the Interest Rate Parity based on the above information?
(b) Show the strategy to capture the arbitrage profit by setting up the transactions required at t=0 (i.e., today) and cash flows at t=0 and t=1 (i.e., today and 1-year from today) in a transaction table format. (Your arbitrage profit should be in U.S. dollar.)