Question

4. a. The current spot rate is $0.50/SFr and the 180 days (convert to months) forward exchange rate is $0.52/SFr – is this a forward premium or discount? _______ Show calculations!

b. Given the current spot exchange rate as $1.8/pd and the interest rate on dollar denominated bonds to be 2%, while that on pound denominated bonds to be 3% and given that financial investors expect the spot exchange rate to be $1.77/Pd, where does investment occur?

c. If Elon puts aside spending money for Elon students traveling abroad at 500 pounds per student – at the current spot rate of $1.90/pd, how much money would they have to hold in dollars __________ But 6 mths from now when the student traveling needs the 500 pounds but the spot rate is $2.01/pd, how much does Elon now have to pay up in dollars _______.

5a. You read in the Wall Street Journal, “Expecting the future US spot rate or e^e to depreciate results in the actual nominal spot dollar or e to plummet in value” Explain this using the interest parity condition and the foreign exchange market. You can use the FX market diagram to explain your answer and use the equation as well.

b. If a tickets costs $450 in the US and the same ticket costs 90 pounds in the UK – given that the exchange rate is $3/pd, where would you buy it, assuming no transaction costs between the countries?

c. If current foreign exchange rates were 1.6 euros per dollar, 120 Yen per dollar and 80 yen per euro explain how a person holding dollars could make a profit by engaging in triangular arbitrage with $100?

Answer 1