3. You are to receive €400,000 in 90 days. a) Demonstrate how you would set up an options hedge. b) If the spot rate in 90 days is $1.10/€1.00. You receive the €400,000 and you exchange the euros into dollars. What is the net amount of dollars you receive and dollar/euro exchange rate for the €400,000?
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- Suppose you start with buying a stock in £ (equivalent to $100) when the exchange rate is £1 = $1.5. One year later, the stock price changes to £75, and you sell it. At the time of the sale, the exchange rate is £1 = $1.6. What is your total percentage return? What percentage of your return is due to the exchange rate? Total return = 12.50%; Exchange rate return = 6.67%. Total return = 20%; Exchange rate return = 7.50%. Total return = 20%; Exchange rate return = 0.0%. Total return = 12.50%; Exchange rate return = 7.50%. Total return = 0.0%; Exchange rate return = 7.50%. Total return = 20%; Exchange rate return = 6.67%.Q2) Suppose the current one-year euro swap rate y0[0, 1] is 1.74%, and the two-yearand three-year swap rates are 2.24% and 2.55% respectively. Euro swap rates are quotedwith annual payments and 30/360 daycount (thus α = 1). A hedge fund(HF) executes the following two trades with a dealer:1(1) The HF pays fixed and receives floating on e100 million notional of a one-year swap atthe forward swap rate.(2) The HF receives fixed and pays floating on e100 million notional of a three-year swapat the forward swap rate.Assume bid-offer costs are negligible.a) After one year, what net cashflow has the dealer paid to (or received from) the HF?b) Suppose after one year, one-year and two-year euro swap rates are unchanged. What isthe current value of the remaining part of the HF trade?c) Suppose after one year, the one-year euro swap rate is unchanged but the two-year euroswap rate is now Y%. What value of Y gives a total zero profit on the trade (at T = 1)?d) Do you like the trades the HF…Suppose a European call option to buy 1 euro for 1.40 CAD costs 0.08 CAD. The option maturity is in two months and the forward exchange rate for the same maturity is 1.50 CAD per euro. What arbitrage opportunity exists? Explain how you can exploit this opportunity and how much the profit is. (Ignore the time value of money)
- Suppose that you are a swap bank and you notice that interest rates on coupon bonds are as shown. Develop the 3-year bid price of a euro swap quoted against flat USD LIBOR. The current spot exchange rate is $1.50 per €1.00. The size of the swap is €40 million versus $60 million. Rates USD Euro In other words, what will you be willing to pay in euro against receiving USD LIBOR? O 6 percent O5 percent none of the options 3-year $ 7% € 5% 7 percentSuppose that you have revenues denominated in Japanese Yen expected in 6 months. How would you hedge this risk using money market instruments? How would a money market hedge compare to a forward hedge?Q1-11 Suppose that a speculator notes that the current 3-month forward rate on the euro is $1.26 and the speculator expects that, in 3 months, the euro will have a value of $1.30. In this situation, the speculator would _______ euros on the forward market, and this activity ______ for the speculator. a. buy / involves risk b. buy / involves no possible risk c. sell / involves risk d. sell / involves no possible risk
- 2. Suppose the exchange rate of euro at current spot market is $1.25/€. If a call option has a strike price of $1.28/€ then we can say this option is a) inthemoney b) outofthemoney c) atthemoney d) past breakeven 3. Suppose the exchange rate of euro at current spot market is $1.25/€. If a put option has a strike price of $1.18/€ then we can say this option is a) inthemoney b) outofthemoney c) atthemoney d) past breakeven 4. According to our class discussion, suppose a U.S. based real estate developer is participating in a bid competition for a land in London. What of the followings can provide the best protection when Pound is expected to appreciate a) Call options b) buy futures c) sell forwards d) buy forwards 5. Which of following activities dominates foreign exchange transactions a) multinational corporations buying and selling foreign exchange b) importers and exporters buying and selling foreign exchange c) banks buying and selling foreign exchange d)…Suppose you observe the following one-year interest rates, spot exchange rates and futures prices. Futures contracts are available on €10,000. How much risk-free arbitrage profit could you make on one contract at maturity from this mispricing? Exchange Rate Interest Rate APR So($/EL F380(S/E) $1.45 €1.00 is 4% $1.48 = €1.00 3% (Note: If you are unable to view the image shown above, you can download it: interestTable.PNG) O $159.22. O $153.10. $439.42. Onone of the options.Suppose that investors are risk-neutral and the linear UIP equation holds. You are given the following information: UK interest rate: i = 0.07 US interest rate: i* = 0.02 Expected future spot rate e^e = 8. What is the current spot rate, e? (State your answer as a number to 2 decimal places. Exchange rates are Pounds per Dollar, in natural logs)
- Question 2 In 6-month from today, a U.S. based company will receive 2,000,000 Australian dollars (AUD) and the company wants to hedge the exchange rate risk. The expected AUD spot rate in 6-month will either appreciate by 5% (p.a) with 40% probability or depreciate by 10% (p.a.) with 60% probability. All rates are continuous compounding (please round your answers to 4 decimals in the exchange rate calculations). As the financial manager of the company, you look at Bloomberg and collect the following information: • U.S. interest rate: . . 4% p.a. 5% p.a. 1 AUD=0.63 USD Spot rate: Call option premium 0.03 USD, with exercise exchange rate 1 AUD-0.65 USD and 6-month maturity Put option premium 0.02 USD, with exercise exchange rate 1 AUD-0.64 USD and 6-month maturity Australian interest rate: 1) Calculate the 6-month forward exchange rate, describe how a forward agreement can be used to hedge the receivable money, and calculate the resulting amount of USD in 6 months.Fred Bankman is a hedge fund manager. He has obtained the following exchange rate and interest rate quotations: Bid Ask Spot rate(dollars per euro) 1.0867 1.0871 One-year forward rate(dollars per euro) 1.1078 1.1083 Deposit Loan One -year euro interest rate 3.212% 3.356% One-year dollar interest rate 5.215% 5.316% Is there any arbitrage opportunity? if so, explain how Mr Bankman might make use of the opportunity and express his arbitrage profit in dollars. If not, explain why not.A European call that will expire in one year is currently trading for $3. Assume the risk-free rate (based on continuous compounding) is 5%, the underlying stock price is $60 and the strike price is $55. a. Is there an arbitrage opportunity? b. Describe exactly what a trader should do to take advantage of the arbitrage opportunity assuming it exists. c. Determine the present value of the profit that the trader can earn assuming you identify an arbitrage opportunity. Use at least four decimal places for those questions that require a numerical answer.