(ii) Assume that you start by borrowing either $100,000 or 10,500,000 Japanese Yen. Using a starting yen per dollar exchange of 105 Yen per dollar and a one- year US interest rate of 5% and one-year Japanese interest rate of 0.5%. Explain how a hedge fund can use the carry trade to make profits or incur losses. In your answer, show the profits or losses in both dollars and yen in the following four cases [(i) to (iv)] making it clear in each case what the profit or loss is in both yen and dollars. (a) The exchange rate stays the same at 105 yen per dollar. (b) The exchange rate moves to 75 yen per dollar (ic) The exchange rate moves to 125 yen per dollar (d) State the breakeven exchange rate for the carry trade

(ii) Assume that you start by borrowing either $100,000 or 10,500,000 Japanese Yen. Using a starting yen per dollar exchange of 105 Yen per dollar and a one- year US interest rate of 5% and one-year Japanese interest rate of 0.5%. Explain how a hedge fund can use the carry trade to make profits or incur losses. In your answer, show the profits or losses in both dollars and yen in the following four cases [(i) to (iv)] making it clear in each case what the profit or loss is in both yen and dollars. (a) The exchange rate stays the same at 105 yen per dollar. (b) The exchange rate moves to 75 yen per dollar (ic) The exchange rate moves to 125 yen per dollar (d) State the breakeven exchange rate for the carry trade

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Fred Bankman is a hedge fund manager. He has obtained the following exchange rate and interest rate quotations: Bid Ask Spot rate(dollars per euro) 1.0867 1.0871 One-year forward rate(dollars per euro) 1.1078 1.1083 Deposit Loan One -year euro interest rate 3.212% 3.356% One-year dollar interest rate 5.215% 5.316% Is there any arbitrage opportunity? if so, explain how Mr Bankman might make use of the opportunity and express his arbitrage profit in dollars. If not, explain why not.
a) You observe the following quotes for the USD/AUD in the spot market from two banks: Bank of Sydney Bank of New York Bid Ask Bid Ask 0.71711 0.71715 0.71708 0.71715 Do these quotes imply the possibility of earning a profit by using locational arbitrage? If so, calculate the potential profit if you are able to use AUD 25,000. If not, explain why arbitrage is not possible? (b) You observe the following quotes for the GBP /AUD in the spot market from two banks: Bank of Melbourne Bank of London Bid Ask Bid Ask 0.5458 0.5459 0.5514 0.5515 Do these quotes imply the possibility of earning a profit by using locational arbitrage? If so, calculate the potential profit if you are able to use GBP 50,000. If not, explain why arbitrage is not possible? c) You observe the following quotes for the EUR / USD in the spot market from two banks: Deutsche Bank Bank of America Bid Ask Bid Ask 1.18102 1.18102 1.18094 1.18100 Do these quotes imply the…
Assume the bid rate of an Yen dollar is $ 1.8 while the ask rate is $ 3.5 at Arab Bank.Assume the bid rate of an Yen dollar is $3.4 while the ask rate is $5.7 at Palestine Bank. Given this information, what would be your gain if you use $8876.7 and execute locational arbitrage? =8876.713.5^ * 3.4b =8876.7/5.7^ * 3.5c =8876.7/3.4^ * 1.8d = 8876.7 /3.5^ * 5.7
In search of arbitrage profits in the forex market, you ring ANZ bank and Commonwealth bank. Both are Australia commercial bank. These two banks offer you the following quotes for the USD at the same time: MYR/USD 1.1650- 1.1670 UOB Bank HSBC Bank MYR/USD 1.1640- 1.1660 Illustrate your calculation start with RM1 million. Can you make an arbitrage profit with these quotes?
You observe the following quotes for the USD/AUD in the spot market from two banks:Bank of Sydney /Bank of New YorkBid Ask/ Bid Ask0.71711 0.71715 /0.71708 0.71715Do these quotes imply the possibility of earning a profit by using locational arbitrage? If so, calculatethe potential profit if you are able to use AUD 25,000. If not, explain why arbitrage is not possible?(b) You observe the following quotes for the GBP /AUD in the spot market from two banks:Bank of Melbourne/ Bank of LondonBid Ask/ Bid Ask0.5458 0.5459 /0.5514 0.5515Do these quotes imply the possibility of earning a profit by using locational arbitrage? If so, calculatethe potential profit if you are able to use GBP 50,000. If not, explain why arbitrage is not possible?c) You observe the following quotes for the EUR / USD in the spot market from two banks:Deutsche Bank/ Bank of AmericaBid Ask /Bid Ask1.18102 1.18102 /1.18094 1.18100Do these quotes imply the possibility of earning a profit by using locational arbitrage? If…
(Capital asset pricing model) Grace Corporation is considering the following investments. The current rate on Treasury bills is 2.5 percent and the expected return for the market is 9 percent. Stock Beta K 1.06 G 1.28 B 0.78 U 0.93 (Click on the icon in order to copy its contents into a spreadsheet.) a. Using the CAPM, what rates of return should Grace require for each individual security? b. How would your evaluation of the expected rates of return for Grace change if the risk-free rate were to rise to 4 percent and the market risk premium were to be only 6 percent? c. Which market risk premium scenario (from part a or b) best fits a recessionary environment? A period of economic expansion? Explain your response. Question content area bottom Part 1 a. The expected rate of return for security K, which has a beta of 1.06, is enter your response here%. (Round to two decimal places.) Part 2 The expected rate…
Assume that You are risk manager at ABC Investment. ABC Investment lends 100.000.000 USD for 330 day and borrow 80.000.000 EUR to finance a new project for 180 day. Nowadays investors expect high volatility in FX and want to hedge itself. Find forward rate of ABC Inc. using exchange and interest rates below. USD/TL: 5,8725/5,9850 EURO/TL: 6,6700/6,7250 USD faiz oranı: 4,50/5,00 EURO Faiz Oranı: 6,25/7,50 TLLIBOR: 12,25/14,00
Suppose that investors are risk-neutral and the linear UIP equation holds. You are given the following information: UK interest rate: i = 0.07 US interest rate: i* = 0.02 Expected future spot rate e^e = 8. What is the current spot rate, e? (State your answer as a number to 2 decimal places. Exchange rates are Pounds per Dollar, in natural logs)
Assume that You are risk manager at ABC Investment. ABC Investment lends 100.000.000 USD for 330 day and borrow 80.000.000 EUR to finance a new project for 180 day. Nowadays investors expect high volatility in FX and want to hedge itself. Find forward rate of ABC Inc. using exchange and interest rates below USD/TL: 5,8725/5,9850 EURO/TL: 6,6700/6,7250 USD interest rate: 4,50/5,00 EURO interest rate: 6,25/7,50 LIBOR of sales rate: 12,25/14,00
Illustrate how the currency risk exposure can be hedged for Fund Y. Determine the payoff for the forward position if the exchange rate rises to MYR/RMB 1.6830 after 3 months.
You are the treasury department of a JFINEX Bank and your client has some excess Euros. If he wants to sell EUR to you, what will be your EUR buying rate if you want 0.020 spread assuming the inter-bank market quote is EUR/USD 1.1580 - 1.6100? 1.1560 1.5900 1.1380 1.6300
Suppose that you have the following utility function: U=E(r) – ½ Aσ2 and A=3 Suppose that you have $10 million to invest for one year and you want to invest that money into ETFs tracking the S&P 500 (US) and S&P/TSX 60 (Canada) index, which are often used as proxies for the US and Canadian stock markets, respectively, and the Canadian one-year T-bill. Assume that the interest rate of the one-year T-bill is 0.35% per annum. You have found two ETFs that you are interested in. From a set of their historical data between 2001 and 2019, you have estimated the annual expected returns, standard deviations, and covariance as follows: ETFUS : E(r)= 0.070584 0.173687 ETFCDA : E(r)= 0.073763 0.16816 Covariance between ETFUS and ETFCDA = 0.02397 Answer the following questions using Excel: Draw the opportunity set offered by these two securities (with increments of 0.01 in weight). Hint: In Excel, calculate the portfolio expected return and…

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