this part of deposit. The spot pound rate in U.S. dollars on January 14 is 1.437. The company can get £117‚500 ×1.437 = $168847.5 when they exchange the deposit. Three-month deposits interest rate in the U.S. is 8% annually. Therefore‚ the interest rate would be 0.08/4=2%. The company can get $168847.5 × 1.02 = $172224.5 from the 10% deposit. The company will receive GBP 1.0575 million on April 14‚1986. The exchange rate on April 14 remains unknown. However‚ the pound has weakened over the previous
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initial BOP disequilibrium. 3. Suppose that the pound is pegged to gold at 6 pounds per ounce‚ whereas the franc is pegged to gold at 12 francs per ounce. This‚ of course‚ implies that the equilibrium exchange rate should be two francs per pound. If the current market exchange rate is 2.2 francs per pound‚ how would you take advantage of this situation? What would be the effect of shipping costs? Answer: Suppose that you need to buy 6 pounds using French francs. If you buy
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Chapter 7 International Arbitrage and Interest Rate Parity Lecture Outline International Arbitrage Locational Arbitrage Triangular Arbitrage Covered Interest Arbitrage Comparison of Arbitrage Effects Interest Rate Parity Derivation of Interest Rate Parity Determining the Forward Premium Graphic Analysis of Interest Rate Parity How to Test Whether Interest Rate Parity Exists Interpretation of Interest Rate Parity Does Interest Rate Parity Hold? Considerations When Assessing Interest Rate Parity
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result of the sliding value of the euro with respect to the Japanese Yen. Between early 1999 and early 2001 (2 year ~ medium-run time horizon)‚ the euro had fallen by approximately 28% with respect to the yen and about 14% with respect to the British pound. By now‚ Toyota had already taken significant losses for their sales within Europe due to the sliding value of the euro. However‚ I believe that Toyota’s strategy at this point was to continue absorbing the exchange rate differences in order to maintain
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dollars decreases (THERE IS PRESSURE FOR THE U.S. DOLLAR TO DEPRECIATE. IN THIS SETTING‚ CHINA HAS TO PURCHASE DOLLARS TO MAINTAIN ITS PEG) • Consider Figure 10.4‚ “Supply and Demand in the Foreign Exchange Market.” If U.S. demand for the British pound decreases‚ in the long run (THE DEMAND CURVE WILL SHIFT IN TO THE LEFT‚ AND THE DOLLAR WILL APPRECIATE) • If the U.S. dollar depreciates in terms of the Euro (American goods would be cheaper for Europeans) • In a fixed exchange rate system‚ how do
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1) Assume the spot rate of the British pound is $1.73. The expected spot rate one year from now is assumed to be $1.66. What percentage depreciation does this reflect? [$1.66 – $1.73]/$1.73 = –4.05% Hence‚ the expected depreciation is 4.05%. 2) Assume that the U.S. inflation rate becomes high relative to Canadian inflation. Other things being equal‚ how should this affect the (a) U.S. demand for Canadian dollars‚ (b) supply of Canadian dollars for sale‚ and (c) equilibrium value of the
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inflation in the dollar to the British pound has severe implications for the profit potential on this project. Dozier currently has four different alternatives they can choose to do; they can do nothing‚ use a forward contract‚ use a money market hedge‚ or buy options. Do Nothing If Dozier Industries elects to do nothing they have no control over whether the project earns a profit or suffers from a loss. Using this strategy Dozier is hoping that the British pound will regain value against the dollar
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profit per unit = –$.05 Net Profit = 50‚000 units × (–$.05) = –$2‚500 2. Speculating with Currency Put Options. Alice Duever purchased a put option on British pounds for $.04 per unit. The strike price was $1.80 and the spot rate at the time the pound option was exercised was $1.59. Assume there are 31‚250 units in a British pound option. What was Alice’s net profit on the option? ANSWER: Profit per unit on exercising the option = $.21 Premium paid per unit = $.04 Net profit per
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Display “Please make a selection” Display “international Currency Types:” Display “1: Canadian Dollars” Display “2: Mexican Pesos” Display”3: English Pounds” Display “4: Japanese Yen” Display “5: French Francs” Display “6: Quit: Display “Enter a selection:”; Input Currency Type
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4. Would any of the hedges you compared in question 2 for the British pounds to be received in 90 days require Blades to overhedge? Given Blades’ exporting arrangements‚ do you think it is subject to overhedging with a money market hedge? Since Ben Holt want to hedge all the exposure and there are 31‚250 pounds in a put option. However‚ Blades will receive 4‚000‚000 pounds in 90 days and it will need to purchase 128 put options to cover this exposure. In this case‚ none of the hedges would require
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