The following information on interest rates and exchange rates is available to all with access to any of the finance data providers: Currency Euro GBP* Yen Spot 2.0310/20 1.4890/00 154.20/30 Currency AUD Euro GBP Yen 1 Month 22/18 55/22 8/6 3 Months 64/54 160/156 33/27 * 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 1/100th 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. 1 Month 5.6785-5.8125 4.4375-4.5625 10.0625-10.1875 5.1250-5.1875 6 Months 128/105 302/289 75/62 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. 12 Months 227/228 560/523 164/137 3 Months 6 Months 12 Months 5.6250-5.7500 5.5000-5.6250 5.5000-5.6250 4.3125-4.4375 4.3125-4.4375 4.3125-4.4375 9.8750-9.9375 9.6875-9.7500 9.6250-9.7500 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] (b) Now suppose this investor expects a GBP 2 million payment in a month from client based in Glasgow. While he doesn't have a strong opinion on how the exchange rate is likely to move, he is intent on eliminating the uncertainty around the value of the GBP. What options does he have and what are the costs of eliminating this risk? Which approach should he utilise? Provide your answer in dollar terms. [7 points]