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A U.S. bank has a U.S. corporate customer that has suppliers and incurs significant costs in a foreign country X. The customer would like to
A U.S. bank has a U.S. corporate customer that has suppliers and incurs significant costs in a foreign country X. The customer would like to hedge against the potential fluctuations in the exchange rate one year ahead. Currently, the spot exchange rate is $1.50 per unit of currency X. Interest rate in the U.S. is 5%, and in country X it is 6% per year. If the bank provides the hedge to the customer, and the forward price agreed upon is $1.65 on 1,000,000 units of foreign currency, what should the bank do to cover its own exchange rate risk that results from the deal? A. Invest in 952,381 units of foreign currency 1.65/(1+0.06)A1=1.55 B. Invest in 1,000,000 units of foreign currency C. Borrow $952,381 in the U.S. (D.) Borrow $1,415,094 in the U.S. Wse the same data as in Problem 10. If the bank covers its exchange rate risk properly, what arbitrage profit will it receive in one year? (Hint: just use interest parity.) a. $135,714 b. $183,414 c. $164,151 d. $139,698
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