INTB 336

HW#1

Due August 12 (in the beginning of the class)

Please be precise and logical in answering the following questions. Please show the processes to reach your answers in a separate paper.

1. Suppose you have the following spot exchange rates:

1 = $1.57, euro 1 = $1.23, and 1 = euro 1.25.

i) Please check if the cross rate between the euro and the UK pound () is consistent or not.

ii) How much profit (in $ terms) could you make from trading $1,000? Describe your trading process to get your profit.

2. You purchased a European foreign exchange option contract to buy 5000 UK pound at the price of $1.66/ which expires today. You have paid $250 for the contract. Suppose the spot rate on the expiration date, today, is $1.69/, what will be your optimal decision for the contract (exercise or not exercise)?

3. The recent market data on the U.S. and UK are shown as:

the spot rate of the UK pound $1.55/

the 90-day forward rate $1.57/

the 180-day forward rate $1.58/

your expected future spot rate in 3 months $1.56/

your expected future spot rate in 6 months $1.59/

interest rate (TB) in the U.S.: 4% (per year)

interest rate (TB) in the UK.: 2% (per year)

If you have $1 million available for 3 months, where do you want to invest (assume no transaction costs)?