3. Assume that you are the manager of the foreign exchange trading desk of a US exchange dealer.

The current spot exchange rate is $1.40/.

The one-year interest rate in the US is 8%, and the rate in Europe is 10%.

Assume that a US customer wants to buy 25 million forward in one year.

• What forward rate would you offer the customer so that your firm nets a return of 2% over the

forward rate on the transaction?

Assume that you will hedge your exposure to exchange rate risk in the spot market.

4. Assume a US money manager has $100 million that needs to be invested short term.

They see the following information

Sport rate for is $1.5640/, or .6393/$

Forward rate for is $1.5328/, or .6524/$

The short-term interest rate in Britain is 12%, and the US short term rate is 9%.

• Is covered interest arbitrage possible?
• What is the strategy?

5. A US firm needing to borrow $200 million short term faces the following market information.

The Spot rate for Swiss Francs is $.4968/SF, or SF2.0161/$

The Forward Rate for Swiss Francs is $.5024/SF, or SF1.9889/$

Swiss short-term rate is 7%

US short term rate is 9.90%

• In which market should it borrow and why?
• What is the strategy?