International Finance-
Q1. Given the following quotes:
Bid ($/€) Ask ($/€)
Spot 1.1105 1.1145
30-day forward - 9 -11
60-day forward -13 -15
i. If you are about to travel to Germany and wanted to obtain euros immediately, how many $ would you pay today for €10,000?
You have an accounts receivable (AR) of €1,000,000 due in 60 days.
ii. How can you eliminate the uncertainty about the dollar inflow of this asset to you?
iii. What is the relevant exchange rate as an outright quote and in points for the above transaction?
iv. What is the hedged US dollar inflow from this AR?
v. Compute and explain the annualized 60-day forward premium/discount on the $ at the Ask rate.
vi. Suppose that the 90-day interest rate for dollars is 2% per year and that for the euro is 3% per year, both in the London Eurocurrency market. What is the 90-day ($/€) forward Ask quote?
vii. What is the percentage bid-ask spread on the spot rate and what does it tell you?
Q2. The following exchange rate and money market quotes were available to you one year ago:
DKK/USD Spot 6.7575 Danish 1-year interest rate: 0.650%
DKK/USD 12M Forward: -828.3800 U.S. 1-year interest rate: 1.500%
i. Explain whether or not there was an arbitrage opportunity at the time.
ii. If there was an arbitrage opportunity, demonstrate how you profited from it and the profit you made.
iii. A year ago you borrowed $1m for one year at 4.125% in the US and used it to invest in 1-year Brazilian securities paying 11.25%. The spot rate at the time was BRL2.4614/$. Today you redeem this investment when the spot rate is BRL3.9075/$. What is your profit/loss?
iv. Given the exchange rates in iii. above and that during the year the rate of inflation in Brazil was 9.45% and in the U.S. it was 3%, what exchange rate (BRL/$) would you have expected today?
v. Is the Brazilian real over- or under-valued and by how much?
vi. Clearly discuss several possible implications of the over- or under-valuation observed above.
Q3. MedImports Jamaica Ltd, an importer of US medical equipment is engaged in finalizing prices for the next year with its US supplier. Over the recent past the $ has been showing signs of appreciation against the J$, raising concerns for MedImports. The exchange rate last year was J$112.9250/$ and the US exporter charged $1,200 per defibrillator. For the coming year US inflation is expected to be 3% and that for Jamaica 9%.
i. What would be the full pass-through J$ cost of the defibrillators?
ii. MedImports got the US exporter to agree to pass-through only 73% of any appreciation of the $ into the prices. What will be the new partial pass-through J$ cost of the defibrillators?