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1、_一、名词1、 American option2、 foreign exchange rate 3 、Absolute purchasing power parity、 4、CurrencySwap5 、Fisher Effect6、Intrinsic Value 、7、hedge8、Call Option9、Money Markets10、Transaction Exposure 、11 、operating exposure12 、European Option13、systematic risk14、 the law of one price二、计算1、Jason Smith is a
2、foreign exchange trader with Citibank. He notices the following quotes.Spot exchange rateSFr1.6627/$Six-month forward exchange rateSFr1.6558/$Six-month $ interest rate3.5% per yearSix-month SFr interest rate3.0% per yeara. Ignoring transaction costs, is the interest rate parity holding?b. Is there a
3、n arbitrage possibility? If yes, what steps would be needed to make an arbitrage profit? Assuming that Jason Smith is authorized to work with $1,000,000 for this purpose, how much would the arbitrage profit be in dollars?Solution:a.For six months, rSFr = 1.50% and r$ = 1.75%. Because the exchange ra
4、te is in SFr/$ terms, the appropriateF1rSFr, orFexpression for the interest rate parity relation is1r$(1 r$ ) (1 rSFr )SS精品资料_The left side of this expression isF1.6558(1 r$ )(1 0.0175) 1.0133S1.6627The right side of the expression is: 1 + rSFr = 1.0150. Because the left and right sides are not equa
5、l, IRP isnot holding.b.Because IRP is not holding, there is an arbitrage possibility: Because 1.0133 < 1.0150, we can say that theSFr interestrate quote is more than whatit should be as per the quotes for the otherthree variables.Equivalently, we can also say that the $ interest rate quote is les
6、s than what it should be as per the quotesfor the other three variables. Therefore, the arbitrage strategy should be based on borrowing in the $ marketand lending in the SFr market. The steps would be as follows:精品资料_Borrow $1,000,000 for six months at 3.5% per year. Need to pay back $1,000,000×
7、;(1 + 0.0175) =$1,017,500 six months later.Convert $1,000,000 to SFr at the spot rate to get SFr 1,662,700.Lend SFr 1,662,700 for six months at 3% per year. Will get back SFr 1,662,700×(1 + 0.0150) = SFr1,687,641 six months later.Sell SFr 1,687,641 six months forward. The transaction will be co
8、ntracted as of the current date butdeliveryand settlementwill only take place six monthslater. So, six monthslater, exchangeSFr1,687,641 for SFr 1,687,641/SFr 1.6558/$ = $1,019,230.The arbitrage profit six months later is 1,019,2301,017,500 = $1,730.2、John Duell, a foreign exchange trader at J.P. Mo
9、rgan Chase, can invest $5 million, or theforeign currency equivalent of the bank's short term funds, in a covered interest arbitrage withDenmark. Using the following quotes can John Duell make a covered interest arbitrage (CIA)profit? Please list his arbitrage steps and calculate the arbitrage p
10、rofits.Spot exchange rate (kr/$)6.17203-month forward rate (kr/$)6.1980US dollar 3-month interest rate3.000%Danish kroner 3-month interest rate5.000%AssumptionsValueArbitrage funds available$5,000,000Spot exchange rate (kr/$)6.1720精品资料_3-month forward rate (kr/$)6.1980US dollar 3-month interest rate
11、3.000%Danish kroner 3-month interest rate5.000%Arbitrage Rule of Thumb: If the difference in interest rates is greater than the forward premium/discount, or expectedchange in the spot rate for UIA, invest in the higher interest yielding currency. If the difference in interest rates is less thanthe f
12、orward premium (or expected change in the spot rate), invest in the lower yielding currency.Difference in interest rates (ikr - i$)2.000%Forward discount on the krone-1.678%CIA profit potential0.322%This tells Steve Shi that he should borrow dollars and invest in the higher yielding currency the Dan
13、ish kroner, for CIAprofit.U.S. dollarinterest rate(3-month)START3.000%END$5,000,000.001.0075$5,037,500.00 精品资料_5,041,263.31$3,763.31->90 daysSpot (kr/$)->Forward-90 (kr/$)6.17206.1980kr 30,860,000.001.0125 kr 31,245,750.005.000%Danish kroner interest (3-month)John Duell generates a covered int
14、erest arbitrage (CIA) profit because he is able to generate an even higher interestreturn in Danish kroner than he "gives up" by selling the proceeds forward at the forward rate.精品资料_3、The current spot exchangerate is $1.95/ and the three-monthforwardrate is $1.90/ . Basedon youranalysisof
15、 the exchangerate, you are pretty confidentthat the spot exchangerate will be $1.92/ in threemonths. Assume that you would like to buy or sell1,000,000.a.What actions do you need to take to speculate in the forward market?What is the expected dollar profitfrom speculation?b.What would be your specul
16、ativeprofit in dollar termsif the spot exchangerate actuallyturns out tobe$1.86/ .Solution:a.If you believe the spot exchange rate will be $1.92/in three months, you should buy1,000,000 forwardfor $1.90/ .Your expected profit will be:$20,000 =1,000,000 x ($1.92 -$1.90).b.If the spot exchange rate ac
17、tually turns out to be $1.86/in three months, your loss from the long positionwill be:-$40,000 =1,000,000 x ($1.86 -$1.90).4、Unilever s affiliate in India, Hindustan Lever, procuresmuch of its toiletriesproduct line from aJapanese company. Because of the shortage of working capital in India, payment
18、 terms by Indian精品资料_importers are typically 180 days or longer. Hindustan Lever wishes to hedge 8.5 million Japaneseyen payable.Althoughoptionsare not availableon the Indian rupee (Rs), forwardrates areavailable against the yen. Additionally, a common practice in India is for companies like Hindust
19、anLever to work with a currency agent who will, in this case, lock in the current spot exchange rate inexchange for a 4.85% fee. Using the following exchange rate and interest rate data, recommend ahedging strategy.Hint: Comparethe un-hedgedposition, forward hedge, money market hedge and Indian curr
20、encyAgent hedge, and get your recommendation.Spot rate ( ￥/$)120.60Spot rate, rupees/dollar (Rs/$)47.75180-day forward rate ( ￥/Rs)2.4000Expected spot rate in 180 days (￥/Rs)2.6000180-day Indian rupee investing rate8.000%180-day Japanese yen investing rate1.500%Currency agent's exchange rate fee
21、4.850%Hindustan Lever's cost of capital12.00%精品资料_AssumptionsValues180-day account payable,Japanese yen (￥)8,500,000Spot rate ( ￥/$)120.60Spot rate, rupees/dollar (Rs/$)47.75Implied (calculated) spot(120.60 /rate ( ￥/Rs)2.525747.75)180-day forward rate ( ￥/Rs)2.4000Expected spot rate in 180 days
22、(￥/Rs)2.6000180-day Indian rupee investingrate8.000%180-day Japanese yen investingrate1.500%Currency agent's exchange ratefee4.850%Hindustan Lever's cost of capital12.00%SpotRisk精品资料_Hedging AlternativesValuesRate (Rp/$)Assessment1. Remain Uncovered, settling A/P in 180 days at spot rateIf s
23、pot rate in 180 days is same ascurrent spot3,365,464.342.5257RiskyIf spot rate in 180 days is same asforward rate3,541,666.672.4000RiskyIf spot rate in 180 days isexpected spot rate3,269,230.772.6000Risky2. Buy Japanese yen forward180 daysSettlement amount at forward rate(Rs)3,541,666.672.4000Certai
24、n3. Money Market HedgePrincipal A/P (￥)精品资料_8,500,000.00discount factor for yen investingrate for 180 days0.9926Principal needed to meet A/P in180 days ( ￥)8,436,724.57Current spot rate ( ￥/Rs)2.5257Indian rupee, current amount (Rs)3,340,411.26Hindustan Lever's WACCcarry-forwad factor for 180 da
25、ys1.0600Future value of money markethedge (Rs)3,540,835.94Certain4. Indian Currency Agent HedgePrincipal A/P ( ￥)8,500,000.00Current spot rate ( ￥/Rs)2.5257Current A/P (Rs)3,365,464.34精品资料_Plus agent's fee (4.850%)163,225.02Hindustan's WACC carry-forwadfactor for 180 days on fee1.0600Total f
26、uture value of agent's fee(Rs)173,018.52Total A/P, future value, A/P + fee(Rs)3,538,482.87CertainEvaluation of AlternativesThe currency agent is the lowesttotal cost, in CERTAIN futurerupee value, of all certainalternatives.5 、 Doproblem1 over again,thistimeassumingmorerealisticallythata swapban
27、kis involvedas anintermediary.Assume the swap bank is quoting five-year dollar interest rate swaps at 10.7% - 10.8% againstLIBOR flat.精品资料_Solution:Alpha will issue fixed-rate debt at 10.5% and Beta will issue floating rate-debt at LIBOR + 1%.Alpha will receive 10.7% from the swap bank and pay it LI
28、BOR.Beta will pay 10.8% to the swap bank andreceive from it LIBOR.If this is done, Alphas floating-rate all-in-cost is:10.5% + LIBOR - 10.7% = LIBOR- .20%, a .20% savings over issuing floating-rate debt on its own.Beta s fixed-rate all-in-cost is:LIBOR+ 1%+ 10.8% - LIBOR = 11.8%, a .20% savings over
29、 issuing fixed-rate debt.6 、 Katya Berezovsky is a currency speculator for madera Capital of Los Angeles. Her latestspeculative position is to profit from her expectation that the U.S. dollar will rise significantlyagainst the Japanese yen. The current spot rate is￥120.00/$. She must choose between
30、thefollowing 90-day options on the Japanese yen:Call on yenPut on yenStrike price (yen/US$)125.00125.00Premium (US$/yen)$0.00046$0.00003(1) Should she buy a call on yen or a put on yen?(2) What is Katy'as break even price on her option of choice in part (1) ?(3) What is Katya's gross profit
31、and net profit if the end spot rate is 140 yen/$?AssumptionsValuesCurrent spot rate (Japaneseyen/US$)120.00in US$/yen$0.00833Maturity of option (days)精品资料_90Expected ending spot rate in 90days (yen/$)140.00in US$/yen$0.00714Call onyenPut on yenStrike price (yen/US$)125.00125.00in US$/yen$0.00800$0.0
32、0800Premium (US$/yen)$0.00046$0.00003a) Should she buy a call on yen or a put on yen?Katya should buy a put on yen to profit from the rise of the dollar (the fall of the yen).b) What is Katy'as break even price on her option ofchoice in part a)?Katya buys a put on yen. Payspremium today.In 90 da
33、ys, exercises the put,精品资料_receiving US$.in yen/$Strike price$0.00800125.00Less premium-$0.00003Breakeven$0.00797125.47c) What is Katya's gross profit and net profit if the end spot rate is 140 yen/$?GrossprofitNet profit(US$/yen)(US$/yen)Strike price$0.00800$0.00800Less spot rate-$0.00714-$0.00714Less premium-$0.00003Profit$0.00086$0.00083精品资料_Welcome ToDownload !欢迎您的下载，资料仅供参考！精品资料