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# Trade Credit, implied annual yield, exchange rate

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1. An Industry sells on terms of 3/10, net 30. Total sales for the year are \$912,500. Forty percent of the customers pay on the 10th day and take discounts; the other 60% pay, on average, 40 days after their purchases.

a. What are the days sales outstanding?

b. What is the average amount of receivables?

c. What would happen to average receivables if McDowell toughened up on its collection policy with the result that all nondiscount customers paid on the 30th day?

2. Calculate the nominal annual cost of nonfree trade credit under each of the following terms. Assume payment is made either on the due date or on the discount date.

a. 1/15, net 20
(All I need is one of these answered as I can create the others with your template)
b. 2/10, net 60
c. 3/10, net 45
d. 2/10. net 45
e. 2/15, net 40

3. A Treasury bond futures contract has a settlement price of 89-8. What is the implied annual yield?

4. Suppose that 1 Swiss franc could be purchased in the foreign exchange market for 60 U.S. cents today. If the franc appreciated 10% tomorrow against the dollar, how many francs would a dollar buy tomorrow?

Please provide me with the formulas in Excel or in a Word document.

#### Solution Summary

Answers questions on Trade Credit, implied annual yield of Treasury bond futures, exchange rate.

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How foreign exchange derivatives markets work.

Explain the role of derivatives in hedging the foreign currency risk.

1. On Monday morning, an investor takes a long position in pound futures contract that matures on Wednesday afternoon. The agreed-upon price is \$1.78 for 62,500 pound sterling. At the close of trading on Monday, the futures price has risen to \$1.79. At Tuesday close the price rises further to \$1.80. At Wednesday close, the price falls to \$1.785, and the contract matures. The investor takes delivery of the pounds at the prevailing price of \$1.785. Detail the daily settlement process (refer to exhibit 8.3). What will be the investor's profit (loss)?
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2. The DEC buys a Swiss franc futures contract (contract size is SFr 125,000) at a price of \$0.83. If the spot rate for the Swiss franc at the date of settlement is SFr1 = \$0.8250, what is DEC's gain or loss on this contract?

3. Assume that the spot price of the British pound is \$1.55, the annualized 30-day sterling interest rate is 10%, the annualized 30-day U.S. interest rate is 8.5%, and the annualized standard deviation of the dollar:pound exchange rate is 17%. Calculate the value of a 30-day PHLX call option on the pound at a strike price of \$1.57.

4. On August 6, you go long one IMM yen futures contract at an opening price of \$0.00812 with a performance bond of \$4,590 and a maintenance performance bond of \$3,400. The settlement prices for August 6, 7, and 8 are \$0.00791, and \$0.00845, and \$0.00894, respectively. On August 9, you close out the contract at a price of \$0.00857. Your round-trip commission is \$31.48.

a. Calculate the daily cash flows on your account. Be sure to take into account your required performance bond and any performance bond calls.

b. What is your cash balance with your broker on the morning of August 10?

5. On June 25, the call premium on a December 25 PHLX contract is 6.65 cents per pound at a strike price of \$1.81. The 180-day interest rate is 7.5% in London and 4.75% in New York. If the current spot rate is 1 pound sterling = \$1.8470 and the put=call parity holds, what is the put premium on a December 25 PHLX pound contract with an exercise price of \$1.81?

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