Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

The following information on interest rates and exchange rates is available to all with access to any of the finance data providers: Currency Spot 1

image text in transcribed
The following information on interest rates and exchange rates is available to all with access to any of the finance data providers: Currency Spot 1 Month 3 Months 6 Months 12 Months Euro 2.0310/20 22/18 64/54 128/105 227/228 GBP 1.4890/00 55/22 160/156 302/289 560/523 Yen 154.20/30 8/6 33/27 75/62 164/137 * The quote for the British Pound (GBP) is AUD per GBP. For the Euro and Yen it is foreign currency per AUD. For most currency pairs, a point is 1/100 of 1% (i.e., 0.0001); the Japanese Yen currency pair is the only exception to this rule. Swap points for Japanese Yen currency pairs (e.g.. Yen per AUD) are quoted to two decimal places only, so one point is 1/100 The table below provides bid and ask interest rates on the Australian dollar (AUD), the Euro, the British Pound (GBP) and the Japanese Yen. These rates are quoted on a per annum basis. Currency 1 Month 3 Months 6 Months 12 Months AUD 5.6785-5.8125 5.5000-5.6250 5.5000-5.6250 5.6250-5.7500 4.3125-4.4375 Euro 4.4375-4.5625 4.3125-4.4375 4.3125-4.4375 9.8750-9.9375 GBP 9.6875-9.7500 9.6250-9.7500 10.0625-10.1875 5.1250-5.1875 Yen 4.7500-4.8125 4.6250-4.6875 4.6250-4.6875 (a) An investor who runs a family office expects the Japanese Yen to depreciate against the Australian dollar by 7% over the next three months. How can this investor try to profit on these expectations through (a) transactions in the spot market only (b) forward market transactions only? Assume that there are no regulatory restrictions whatsoever. Calculate the profit (or loss) on a $1 million position for each of the two cases. What other factors should this investor incorporate in his decision when he considers using spot versus forward markets to execute the transaction? [8 points] The following information on interest rates and exchange rates is available to all with access to any of the finance data providers: Currency Spot 1 Month 3 Months 6 Months 12 Months Euro 2.0310/20 22/18 64/54 128/105 227/228 GBP 1.4890/00 55/22 160/156 302/289 560/523 Yen 154.20/30 8/6 33/27 75/62 164/137 * The quote for the British Pound (GBP) is AUD per GBP. For the Euro and Yen it is foreign currency per AUD. For most currency pairs, a point is 1/100 of 1% (i.e., 0.0001); the Japanese Yen currency pair is the only exception to this rule. Swap points for Japanese Yen currency pairs (e.g.. Yen per AUD) are quoted to two decimal places only, so one point is 1/100 The table below provides bid and ask interest rates on the Australian dollar (AUD), the Euro, the British Pound (GBP) and the Japanese Yen. These rates are quoted on a per annum basis. Currency 1 Month 3 Months 6 Months 12 Months AUD 5.6785-5.8125 5.5000-5.6250 5.5000-5.6250 5.6250-5.7500 4.3125-4.4375 Euro 4.4375-4.5625 4.3125-4.4375 4.3125-4.4375 9.8750-9.9375 GBP 9.6875-9.7500 9.6250-9.7500 10.0625-10.1875 5.1250-5.1875 Yen 4.7500-4.8125 4.6250-4.6875 4.6250-4.6875 (a) An investor who runs a family office expects the Japanese Yen to depreciate against the Australian dollar by 7% over the next three months. How can this investor try to profit on these expectations through (a) transactions in the spot market only (b) forward market transactions only? Assume that there are no regulatory restrictions whatsoever. Calculate the profit (or loss) on a $1 million position for each of the two cases. What other factors should this investor incorporate in his decision when he considers using spot versus forward markets to execute the transaction? [8 points]

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Asymptotic Chaos Expansions In Finance Theory And Practice

Authors: David Nicolay

2014 Edition

1447165055, 9781447165057

More Books

Students also viewed these Finance questions