1) The premium on a pound call and put option is $.03 per unit. The exercise priceis $1.60. What are the break even points for the buyer of the call option and for the buyer of the put option? (Assume zero tranasactions cost and that the buyer and seller of the put option are speculators).

2) Assume the bid rate of a new Zealand dollar is $.33 while the ask rate is $.335 at Bank X. Assume the bid rate of the New Zealand dollar is $.32 while the ask rate is $.325 at Bank Y. Given this information, what would be your gain if you use $1,000,000 and excute locational arbitrage.

3) Assume that interest rate parity holds. The U.S. five-year interest rate is 5% annualized, and the Mexican five-year interest rate is 8% annualized. Today's spot rate of the Mexican peso is $.20 . What is the approximate five-year forecast of the peso's spot rate if the five-year forward rate is used as a forecast?

4) Assume the following information:

Spot Rate today of Swiss franc = $.60
1-year forward rate as of today for Swiss franc = $.63
Expected spot rate 1-year from now = $.64
Rate on 1-year deposits denominated in Swiss francs = 7%
Rate on 1-year deposits denominated in US dollars = 9%

From the perspective of US invetors with $1,000,000, what would be rate of return under covered interest arbitrage?

1) The premium on a pound call and put option is $.03 per unit. The exercise priceis $1.60. What are the break even points for the buyer of the call option and for the buyer of the put option? (Assume zero tranasactions cost and that the buyer and seller of the put option are speculators).

A call option is exercised when the asset price increases beyond the exercise price
A put option is exercised when the asset price decreases beyond the exercise price

Breakeven point for buyer of call option= Exercise price + premium= $1.63 =1.6+0.03
Breakeven point for buyer of put option=Exercise price - premium= $1.57 =1.6-0.03

2) Assume the bid rate of a new Zealand dollar is $.33 while the ask rate is $.335 at Bank X. Assume the bid rate of the New Zealand dollar is $.32 while the ask rate is $.325 at Bank Y. Given this information, what would be your gain if you use $1,000,000 and excute locational arbitrage.

Bid rate is the rate at which you can sell NewZealand dollar
Ask rate ...

Solution Summary

Answers questions on Call and Put Options, Locational arbitrage, Interest rate parity, Coverage Interest Arbitrage.

I'm sure that I'm over-simplifying this, but it seems that a company could simply use the average historical exchangerate between the two currencies for the purposes of budgeting....couldn't they?

2. A U.S. firm sells merchandise today to a British company for £100,000. The current exchangerate is $2.03/£ , the account is payable in three months, and the firm chooses to avoid any hedging techniques designed to reduce or eliminate the risk of changes in the exchangerate. The U.S. firm is at risk today of a loss if

The spot rate on the Canadian dollar is 1.23. Interest rates in Canada are expected to average 4.2 percent while they are anticipated to be 3.3 percent in the U.S. What is the expected exchangerate three years from now?
a) C$1.2760
b) C$1.2635
c) C$1.2483
d) C$1.2108

You are based in the UK and have a contract with your bank to sell ? at the exchangerate £0.8/? if the exchangerate is less or equal to £0.8/? in one month's time and to sell the ? at £0.9/? if the exchangerate is greater or equal to £0.9/? at that time. Should the exchangerate lie between £0.8/? and £0.9/?, you will

Firm has a british customer that is willing to place a $1mill order but wants to pay in pounds instead of dollars. The spot exchangerate is $1.85 - pd1.00 and the one year forward rate is $1.90 - pd1.00. Lead time is payment is due in one year. What is the fairest exchangerate to use?

5. From the base price level of 100 in 1974, German and U.S. price levels in 2001 stood at 200 and 370, respectively. If the 1974 $/DM exchangerate was $0.23/DM, what should the exchangerate be in 2001?
Suggestion: Using the purchasing power parity, adjust the exchangerate to compensate for inflation. That is, determine t

GDP Deflator France GDP Deflator US Market exchangerate
1980 85.7 76.0 2.49 francs/$
1990 113.4 119.6 2.12 francx/$
Computer the real exchangerate for 1980 and 1990.
I know the following:
real exchangerate = exchangerate * US

Suppose the spot exchangerate for the Hungarian florin is HUF 238. Interest rates in the United States are 4.1 percent per year. They are 3.6 percent in Hungary. What do you predict the exchangerate will be in three years?
a) HUF 234.45
b) HUF 236.90
c) HUF 241.59
d) HUF 236.81
e) HUF 239.19
How does this derive the