QUESTION 1

1. Part I: Managing Transaction Exposures

   Assume the following information:

   • Spot rate: CHF/USD = 0.7142
   • 90-day forward rate: CHF/USD = 0.7114
   • USD 90-day interest rate: 3.75% (APR)
   • CHF 90-day interest rate: 5.33% (APR)

   The option data for July contracts is given the table below.

   Strike price (CHF/USD)	Call Premium	Put Premium
   0.70	2.55 per CHF	1.42 per CHF
   0.72	1.55 per CHF	2.4 per CHF

   1. U.S. Company ABC, which exports to Switzerland, expects to receive CHF 450,000 in 90 days. Should Company ABC use currency derivatives to hedge transaction risk? If yes, which derivatives should Company ABC use? Please use a contingency graph to support your choices and computation. If no, please explain why (20 points).
   2. U.S. Company XYZ, which imports Swiss watches, needs to pay CHF 750,000 in 90 days. Should Company XYZ use currency derivatives to hedge transaction risk? If yes, which derivatives should Company XYZ use? Please use a contingency graph to support your choices and computation. If no, please explain why (20 points).

   Note that the time to pay option premium and time to exchange currencies are different. Please account for the opportunity costs/profit (time value of option premium).

   Part II: Triangular Arbitrage

   The quotations of exchange rates of US dollars, British pound, and the New Zealand dollar in National Bank is as below.

   	Quoted Bid Price	Quoted Ask Price
   USD/GBP	0.65	0.66
   NZD/USD	0.50	0.52
   GBP/NZD	2.72	2.75

   Is the triangular arbitrage feasible? If yes, how much is the triangular arbitrage profit when you have $500,000 to invest. If no, please explain why (20 points).

   Part III: Interest Rate Parity and Covered Interest Arbitrage Assume the following information:

   Current spot rate of Australian dollar	=	$.65
   Forecasted spot rate of Australian dollar 1 year from now	=	$.69
   1-year forward rate of Australian dollar	=	$.68
   Annual interest rate for Australian dollar deposit	=	5%
   Annual interest rate in the United States	=	8%

   1. According to Interest Rate Parity, is the covered interest arbitrage feasible to U.S. investors and Australian investors? Please explain your answers (20 points).
   2. Suppose an U.S. investor can borrow up to $500,000 to invest and an Australian investor can borrow up to Australian $800,000 to invest. How much is the covered interest rate arbitrage profit for the U.S. investor and Australian investor if the covered interest arbitrage is feasible to them (20 points)?