Question

Use the following information to answer the next three questions.DO NOT USE EXCEL PLEASE. Formula to be used :

p= forward premium: (F-S)/S. (direct quotes)

•S=current spot rate

Next > < Previous

Sort answers by oldest

• Votes
• Oldest
• Newest

Homework Answers

Answer #1

i) Spot rate (¥ per C$) = 1 / (C$ per $ * $ per ¥)

Spot rate (¥ per C$) = 1 / (C$1.25 * $0.008)

Spot rate (¥ per C$) = 1 / C$0.01

Spot rate (¥ per C$) = ¥100/C$

Now, we will calculate forward rate as per IRP (Interest rate parity) theory,

F / S = (1 + i d) / (1 + i f)

Here,

F = Forward rate, S = Spot rate @ ¥100

i d = Interest rate in domestic country ie Japan @ 7% or 0.07

i f = Interest rate in foreign country ie. Canada @ 2% or 0.02

We will put the values into the formula,

F / ¥100 = (1 + 0.07) / (1 + 0.02)

F / ¥100 = 1.07 / 1.02

F / ¥100 = 1.0490

F = 1.0490 * ¥100

F = ¥104.90

ii) Spot rate (C$ per ¥) = 0.01

Forward rate (C$ per ¥) given = 1 / ¥ per C$

Forward rate (C$ per ¥) = 1 / ¥106.50 = C$0.0094

Now,

Discount/premium formula = (F - S) / S

Here,  

F = Forward rate @ C$0.0094

S = Spot rate @ C$0.01

Put the values into the formula,

Discount or premium on ¥ = (0.0094 - 0.01) / 0.01

Discount or premium on ¥ = - 0.06

¥ currency is at discount against C$ as it is having negative value.

iii) Covered interest arbitrage:

Step 1: Quoted forward rate @ ¥106.50 > calculated forward rate @ ¥104.90. Hence borrow in Japan @7% and invest in Canada @ 2%

Borrowed ¥100 @ 7% and total payable = ¥100 + 7% = ¥107

Step 2: Convert ¥100 into C$ @ spot rate = ¥100 ie C$1

Step 3: Invest C$ 1 @ 2% for one year and recievable after a year = 1 + 2% = C$1.02

Step 4: Convert C$1.02 into ¥ @ forward rate = ¥106.50 ie. C$1.02 * ¥106.50 = ¥108.63

Step 5: Net benefit = Receivable (step 4) - payable (step 1) = ¥108.63 - ¥107 = ¥1.63

Now,

Return % = Gain / spot rate * 100

Return % = 1.63 / 100 * 100 = 1.63%

Know the answer?

Add Answer to:

Use the following information to answer the next three questions.DO NOT USE EXCEL PLEASE. Formula...

Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Log In

Sign Up

Post as anonymous

Post Your Answer

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.

Similar Homework Help Questions

• Please use EXCEL to do it, Thanks! Show your answers along with the formula and steps...

  Please use EXCEL to do it, Thanks! Show your answers along with the formula and steps you used for each question Problem 2: A US-based firm expects to pay 1,000,000 for importing goods 90 days later. Thc firm's manager want to hedgc against possible currency risk in the future. The risk-free rate in US is 2% pa and the Euro risk-free rate is 3% pa Both interest rates will remain the same in 90 days. The current spot exchange rate...

• Use the following information to answer the next three questions. QUESTION 5 As of today, the...

  Use the following information to answer the next three questions. QUESTION 5 As of today, the spot exchange rate is £1.25/$. The U.S. interest rate is 7% and the interest rate in the euro zone is 10%. What is the one-year forward rate (in terms of a direct quote from the US view) that should prevail according to IRP? Round intermediate steps and your final answer to four decimals. Assume the US is the domestic country. Do not use currency...

• PLEASE USE EXCEL AND SHOW EXCEL FORMULAS USED W/THE FORMULA ARGUMENTS PLEASE USE EXCEL AND SHOW...

  PLEASE USE EXCEL AND SHOW EXCEL FORMULAS USED W/THE FORMULA ARGUMENTS PLEASE USE EXCEL AND SHOW EXCEL FORMULAS USED W/THE FORMULA ARGUMENTS THANK YOU! Plan A Plan B Payout P Payout $30,000 0.55 $45,000 $70,000 Payout PPayout -$50,000 0.26 $30,0000.49 $35,000 0.1 0.25 0.35

• Use the information in the table below to answer the following questions: Japanese yen 6-mos forward...

  Use the information in the table below to answer the following questions: Japanese yen 6-mos forward British pound 3-mos forward in U.S. S 009232 .009318 1.5863 1.5855 per U.S. 108.32 107.32 6304 .6307 a. The six-month forward rate for the Japanese yen is per U.S. dollar. The yen is selling at a premium because it is more expensive in the forward market than in the spot market. (Do not round intermediate calculations and round your answer to 2 decimal places,...

• Please provide the full explanation( not on excel), but manually how to solve this problem? Brzoska...

  Please provide the full explanation( not on excel), but manually how to solve this problem? Brzoska Ine.'s German subsidiary has forecasted earnings next year of Cio million. Assume that the current one-year forward rate for euros is $1.33, the same as the current spot rate. Further assume that the euro depreciates over the year, so that the weighted average exchange rate is S1.30 over the year. If Brzoska implements a forward hedge od the expected earnings by selling Cio million...

• DETAIL EVERY ANSWER WITH THE EXCEL FORMULA TO SOLVE THE EQUATION - EVERY ANSWER NEEDS AN EXCEL EQUATION DETAIL EVERY ANS...

  DETAIL EVERY ANSWER WITH THE EXCEL FORMULA TO SOLVE THE EQUATION - EVERY ANSWER NEEDS AN EXCEL EQUATION DETAIL EVERY ANSWER WITH THE EXCEL FORMULA TO SOLVE THE EQUATION - EVERY ANSWER NEEDS AN EXCEL EQUATION DETAIL EVERY ANSWER WITH THE EXCEL FORMULA TO SOLVE THE EQUATION - EVERY ANSWER NEEDS AN EXCEL EQUATION DETAIL EVERY ANSWER WITH THE EXCEL FORMULA TO SOLVE THE EQUATION - EVERY ANSWER NEEDS AN EXCEL EQUATION DETAIL EVERY ANSWER WITH THE EXCEL FORMULA TO...

• Please show the formula and answer in Excel f.   Find the PV of an ordinary annuity...

  Please show the formula and answer in Excel f.   Find the PV of an ordinary annuity that pays $1,000 at the end of each of the next 5 years if the interest rate is 15%. Then find the FV of that same annuity. Inputs: PMT = $      1,000 N = 5 I/YR = 15% PV: Use function wizard (PV) PV   = FV: Use function wizard (FV) FV   =

• Questions 1-6 Given the following quotes for the euro, direct in Frankfurt, Germany, for the Canadian...

  Questions 1-6 Given the following quotes for the euro, direct in Frankfurt, Germany, for the Canadian dollar, answer the following. (When calculating indirect quotes, round to 4 decimal places). Spot 90 day forward 180 day forward Bid 6558 .6553 .6546 Ask .6562 .6560 6553 2. (4 points) On a points basis, the 1 year direct forward rates are 37/29. Given this information what are the 1 year direct outright bid and ask quotes? 3. (2 points) The Canadian dollar is...

• Questions 1-6 Given the following quotes for the euro, direct in Frankfurt, Germany, for the Canadian...

  Questions 1-6 Given the following quotes for the euro, direct in Frankfurt, Germany, for the Canadian dollar, answer the following. (When calculating indirect quotes, round to 4 decimal places). Spot 90 day forward 180 day forward Bid 6558 .6553 .6546 Ask .6562 .6560 6553 2. (4 points) On a points basis, the 1 year direct forward rates are 37/29. Given this information what are the 1 year direct outright bid and ask quotes? 3. (2 points) The Canadian dollar is...

• Question 4 (total of 50 points) A. Use Table 4.1 for the spot and forward bid-ask...

  Question 4 (total of 50 points) A. Use Table 4.1 for the spot and forward bid-ask rates for the Japanese yen/U.S dollar (/S) exchange rate to answer the following questions. Table 4.1. Spot and Forward Bid-ask Rates Period Days Forward Bid Rate Ask Rate spot l month 6 months 24 months 30 180 720 114.23 113.82 112.05 106.83 114.27 113.87 112.11 106.98 1. Calculate the mid-rates from the bid-ask rate quotes 2. Calculate the forward premium on the different maturities...

Answer 1

i) Spot rate (¥ per C$) = 1 / (C$ per $ * $ per ¥)

Spot rate (¥ per C$) = 1 / (C$1.25 * $0.008)

Spot rate (¥ per C$) = 1 / C$0.01

Spot rate (¥ per C$) = ¥100/C$

Now, we will calculate forward rate as per IRP (Interest rate parity) theory,

F / S = (1 + i d) / (1 + i f)

Here,

F = Forward rate, S = Spot rate @ ¥100

i d = Interest rate in domestic country ie Japan @ 7% or 0.07

i f = Interest rate in foreign country ie. Canada @ 2% or 0.02

We will put the values into the formula,

F / ¥100 = (1 + 0.07) / (1 + 0.02)

F / ¥100 = 1.07 / 1.02

F / ¥100 = 1.0490

F = 1.0490 * ¥100

F = ¥104.90

ii) Spot rate (C$ per ¥) = 0.01

Forward rate (C$ per ¥) given = 1 / ¥ per C$

Forward rate (C$ per ¥) = 1 / ¥106.50 = C$0.0094

Now,

Discount/premium formula = (F - S) / S

Here,  

F = Forward rate @ C$0.0094

S = Spot rate @ C$0.01

Put the values into the formula,

Discount or premium on ¥ = (0.0094 - 0.01) / 0.01

Discount or premium on ¥ = - 0.06

¥ currency is at discount against C$ as it is having negative value.

iii) Covered interest arbitrage:

Step 1: Quoted forward rate @ ¥106.50 > calculated forward rate @ ¥104.90. Hence borrow in Japan @7% and invest in Canada @ 2%

Borrowed ¥100 @ 7% and total payable = ¥100 + 7% = ¥107

Step 2: Convert ¥100 into C$ @ spot rate = ¥100 ie C$1

Step 3: Invest C$ 1 @ 2% for one year and recievable after a year = 1 + 2% = C$1.02

Step 4: Convert C$1.02 into ¥ @ forward rate = ¥106.50 ie. C$1.02 * ¥106.50 = ¥108.63

Step 5: Net benefit = Receivable (step 4) - payable (step 1) = ¥108.63 - ¥107 = ¥1.63

Now,

Return % = Gain / spot rate * 100

Return % = 1.63 / 100 * 100 = 1.63%