FNCE3004 Semester 2 2017 Assignment
FNCE3004 Semester 2 2017 Assignment
Chapter 6 –International Parity Relationships and Forecasting Foreign Exchange Rates
1.  Suppose you observe a spot exchange rate of $1.50/€. If interest rates are 5% APR in the U.S. and 3% APR in the euro zone, what is the noarbitrage 1year forward rate?

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2.  Suppose that the annual interest rate is 2.0 percent in the United States and 4 percent in Germany, and that the spot exchange rate is $1.60/€ and the forward exchange rate, with oneyear maturity, is $1.58/€. Assume that an arbitrager can borrow up to $1,000,000 or €625,000 a. Determine whether the interest rate parity is currently holding. b. If the IRP is not holding, how would you carry out covered interest arbitrage? Show all the steps and determine the arbitrage profit.

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 Explain how the IRP will be restored as a result of covered arbitrage activities.
Chapter 07 – Futures and Options on Foreign Exchange 3. Consider the graph of a call option shown at right. The option is a threemonth American call option on €62,500 with a strike price of $1.50 = €1.00 and an option premium of $3,125. i) What are the values of A, B, and C, respectively?

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Chapter 08 – Management of Transaction Exposure
5.  Your firm is a U.K.based exporter of bicycles. You have sold an order to a French firm for €1,000,000 worth of bicycles. Payment from the French firm (in euro) is due in 12 months. Use a money market hedge to redenominate this oneyear receivable into a pounddenominated receivable with a oneyear maturity. The following were computed without rounding. Select the answer closest to yours.

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Chapter 11 – International Banking and Money Market
6.  You entered in to a 3 × 6 forward rate agreement that obliged you to borrow $10,000,000 at 3%. Suppose at the maturity of the FRA, the correct interest rate is 3½%. Clearly you are better off since you have the ability to borrow $10,000,000 for 3 months at 3% instead of 3½%. What is the payoff at the maturity of the FRA?

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