1. The $: ? exchange rate is $1 = ?0.85, and the SFr/? exchange rate is SFr 1 = ?0.75 What is the $/SFr exchange rate?
2. Suppose that the forward ask price for March 20 on euros is $0.9227 at the same time that the price of IMM euro futures for delivery on March 20 is $0.9045. Can an arbitrageur profit from this situation? Why or why not?
3. In early 1996, the short-term interest rate in France was 5.7 percent, and forecast
French inflation was 2.8 percent. At the same time, the short-term German interest rate was 2.6 percent and forecast German inflation was 1.6 percent.
a. Based on these figures, where would you borrow-France or Germany? Why?
b. What were the real interest rates in France and Germany? Why are they different?
4. Suppose that six-month interest rates (annualized) in Japan and the United States are 7 percent and 9 percent, respectively. If the spot rate is ¥142:$1 and the ninety-day forward rate is ¥139:$1 and the 180 day forward rate is: ¥152:$1.
a. Where would you invest?
b. Where would you borrow?
c. What arbitrage opportunity do these figures present?
d. Assuming no transaction costs, what would be your arbitrage profit per dollar or dollar-equivalent borrowed?
5. Suppose you observe the following direct spot quotations in New York and Toronto, respectively: 0.8000-30 and 1.2500-70. What are the arbitrage profits per $1 million?
6. Suppose the spot quote on the euro is $0.9302-28, and the spot quote on the Swiss franc is $0.6180-95.
a. Compute the percentage bid-ask spreads on the euro and franc.
b. What is the direct spot quote for the franc in Frankfurt?
7. IBM wishes to raise $1 billion and is trying to decide between a domestic dollar bond issue and a Eurobond issue. The U.S. bond can be issued at a coupon of 6.75 percent, paid quarterly, with underwriting and other expenses totaling 0.95 percent of the issue size. The Eurobond would cost only 0.55 percent to issue but would bear a semi-annual coupon of 6.88 percent. Both issues would mature in ten years.
a. Assuming all else is equal, which is the least expensive issue for IBM?
b. What other factors might IBM want to consider before deciding which bond to issue?
8. Apex Supplies borrows £1 million at 10 percent, payable in one year. If Apex is required to maintain a compensating balance of 15 percent, what is the effective percentage cost of its loan (in pounds)?
This solution involves calculations for exchange rate, arbitrageur profit, interest rates, percentage bid, and spot quotes.