On 19th April, 2020 the FX market has the following spot, forward, and swap rates.
On 19th April, 2020 the FX market has the following spot, forward, and swap rates. JPY: Spot and Forward (/$) GBP: Spot and Forward (S/E) Mid Rate Bid Ask Mid Rate Bid Ask Spot 129.87 129.82 129.92 1.4484 1.4481 1.4487 Forward Rates 1 month 129.68 128.53 -20 -136 -18 -132 1.4459 1.4327 -26 - 160 -24 -154 6 months Swaps 117.65 1232 1212 1.4250 2 year 3 year -238 -265 -230 -253 115.50 1452 1422 1.4225 The six month deposit and borrowing LIBOR rates are as below. Dollar deposit rate per annum 4.000% Dollar borrowing rate per annum 5.000% Pound deposit rate per annum 3.885% Pound borrowing rate per annum 5.000% Yen deposit rate per annum 0.005% Yen borrowing rate per annum 1.250% Required: a. What is the one month forward bid price for dollars as denominated in yen (JPY)? (1 mark) b. According to the information provided in the tables, calculate the gain in dollars ($) or yen () from a Covered Interest Arbitrage (CIA) strategy using the six month forward rate for yen (USD/JPY)? Assume you have access to X10m (PY) or the US dollar equivalent to invest in this strategy. (2 marks) C. Benamier Co., a US based company, has a current WACC of 1096. Benamier is expected to pay 162.50 million in six months. Benamier decides to use forward contracts to hedge the transaction exposure. Each forward contract has a notional value of X12.5 million yen. What is the guaranteed maximum amount of cost in US dollars Benamier can expect from the hedging position and how many forward contracts are needed to hedge 100% of the payment? (2 marks) On 19th April, 2020 the FX market has the following spot, forward, and swap rates. JPY: Spot and Forward (/$) GBP: Spot and Forward (S/E) Mid Rate Bid Ask Mid Rate Bid Ask Spot 129.87 129.82 129.92 1.4484 1.4481 1.4487 Forward Rates 1 month 129.68 128.53 -20 -136 -18 -132 1.4459 1.4327 -26 - 160 -24 -154 6 months Swaps 117.65 1232 1212 1.4250 2 year 3 year -238 -265 -230 -253 115.50 1452 1422 1.4225 The six month deposit and borrowing LIBOR rates are as below. Dollar deposit rate per annum 4.000% Dollar borrowing rate per annum 5.000% Pound deposit rate per annum 3.885% Pound borrowing rate per annum 5.000% Yen deposit rate per annum 0.005% Yen borrowing rate per annum 1.250% Required: a. What is the one month forward bid price for dollars as denominated in yen (JPY)? (1 mark) b. According to the information provided in the tables, calculate the gain in dollars ($) or yen () from a Covered Interest Arbitrage (CIA) strategy using the six month forward rate for yen (USD/JPY)? Assume you have access to X10m (PY) or the US dollar equivalent to invest in this strategy. (2 marks) C. Benamier Co., a US based company, has a current WACC of 1096. Benamier is expected to pay 162.50 million in six months. Benamier decides to use forward contracts to hedge the transaction exposure. Each forward contract has a notional value of X12.5 million yen. What is the guaranteed maximum amount of cost in US dollars Benamier can expect from the hedging position and how many forward contracts are needed to hedge 100% of the payment? (2 marks)
