1. You are the chief financial officer (CFO) of a major textile importer. The company imports most products from China. Identify the foreign exchange rate risk your company faces and explain how you can hedge this risk using futures.
2. The following prices are observed. Please formulate an arbitrage strategy to profit from the situation. Swiss Franc per Dollar exchange rate is 1.5 spot. Pound per Dollar exchange rate is 0.80 spot. Swiss Franc per Pound exchange rate is 2.40 spot.
3. Assume that annual interest rate is 6% in the United States and 8% in Australia. An FI can borrow or lend at these rates. The spot rate is $0.90/AUD. If the forward rate is $0.95/AUD, how could the bank arbitrage using a sum of $1million? At what forward rate is this arbitrage eliminated? (10 points)