Simply Select the correct option and explain it A business executive needs to pay for a major product from Japan in two months (60days). The ForEx (short for foreign exchange) spot rate is USD1 = JPY 110 (Japaneseyen) and the 60 day forward rate is USD1 = JPY 111. What does this mean?The US dollar is appreciating. He should wait 60 days because the currency willbe cheaper then.The US dollar is depreciating. He should wait 60 days because the currency will|be cheaper then.The US executive can buy JPY today at 110 yen per dollar, or buy a forwardcontract that locks his price at 111 yen. This gives him assurance today regardingthe price he will have to pay when payment is due.The US executive can buy JPY today at 110 yen per dollar, or wait for 60 daysand buy it at 111 yen. It's his choice.

A forward contract is a contract between two parties to buy or sell an asset at a future date at a…

Answered: A business executive needs to pay for a…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Similar questions

The British pound (GBP) is currently priced at $1.50 and the Swiss Franc (SF) is priced at $0.50, while the quoted cross rate is 1GB =3.50 SF. If you have $1,000, can you make an arbitrage profit? If so, describe the steps required to create the opportunity and show the profit. If there is no arbitrage profit opportunity, describe how you arrived at that decision.
The company hired You as a financial consultant to manage the currency risk. You expect that the US’ rate will increase by 500 base point on 6 month rate. You convince the company to sign a forward contract with The Arab Bank. 1. What kind of forward exchange rate should the company sign with the Arab bank. Which currency would you choose to be long and which currency short. Explain why 2. Suppose when you called the Arab bank, they told you that the 6 month forward rate is 0.74J/$. If the rate is wrong, explain how would you take advantages of this mistake? Explain How it works- draw a clear draft. 3. How much would be your profit/Loss given that your expectation materialized- the US gov increase the rate by 500 point.
Suppose you have been offered a new job in Australia in one year and you want to make sure your investments give you similar spending power. If the interest rate in Singapore is 1.80 % and Australian interest is 0.35 %, the AUD/SGD spot exchange rate is 0.97 (0.97 AUD for 1 SGD), finally the one year ahead expected inflation in Australia is 3.80 % and for Singapore is 2.90 %. The real interest in Australia would be if Singapore real interest rate is 0.30 percent. Your Answer: Answer
The current market exchange rate is 2.2 francs per pound. Suppose you need to buy 6 pounds using French francs. If you buy 6 pounds directly in the foreign exchange market, it will cost you 13.2 francs. Alternatively, given pound is overpricing (higher than shipping cost), you can _________for the benefit of the exchange. A. first buy an ounce of gold for 6 pounds in England and then ship it to France and sell it for 12 francs B. first buy an ounce of gold for 12 francs in England and then ship it to France and sell it for 6 pounds C. first buy an ounce of gold for 12 francs in France and then ship it to England and sell it for 6 pounds D. first buy an ounce of gold for 6 pounds in England and then ship it to France and sell it for 12 francs
A bank is considering two alternatives for handling its service calls in the next decade ( treat this as one period). The projected number of service calls is 10,000,000. If the bank sets up its own service call center in the U.S., the fixed cost is estimated to be $2,700,000, and the variable cost is calculated to be 32 cents per call. If the call service is outsourced to a foreign company, the fixed cost would be $240,000, and the unit charge would be 57 cents per call. (a)What is the break-even number of service calls? (b)Would the bank set up its own service call center or outsource call handlings? (Enter 1 for Produce or enter O for Outsource) (C)What would be the dollar amount that the bank can save by choosing the better option? (Cost difference between the two options)
Suppose that 1 Danish krone could be purchased in the foreignexchange market today for $0.16. If the krone appreciated 4% tomorrow against thedollar, how many krones would a dollar buy tomorrow?
Suppose that the treasurer of IBM has an extra cash reserve of $100,000,000 to invest for six months. The six-month interest rate is 12 percent per annum in the United States and 11 percent per annum in Germany. Currently, the spot exchange rate is €1.20 per dollar and the six-month forward exchange rate is €1.18 per dollar. The treasurer of IBM does not wish to bear any exchange risk. Where should they invest to maximize the return? Required: a. The maturity value in six months if the extra cash reserve is invested in the U.S.: Note: Do not round intermediate calculations. b. The maturity value in six months if the extra cash reserve is invested in Germany: Note: Do not round intermediate calculations. Round off the final answer to nearest whole dollar. c. Where should they invest to maximize the return? a. Maturity value b. Maturity value C. Better investment
Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge your position by selling Japanese yen forward. The current spot rate of the yen is $.0089, while the forward rate is $.0095. You expect the spot rate in 60 days to be $.0090. How many dollars will you receive for the 5,000,000 yen 60 days from now if you sell yen forward? A. $44,500 B. $45,000 C. $526 million D. $47,500 E. $556 million
Suppose that you are a US-based importer of goods from the United Kingdom. You expect the value of the pound to increase against the U.S. dollar over the next 30 days. You will be making payment on a shipment of imported goods in 30 days and want to hedge your currency exposure. The U.S. risk-free rate is 4.0 percent, and the UK risk-free rate is 30 percent. These rates are expected to remain unchanged over the next month. The current spot rate is $2.10. a. Whether you should use a long or short forward contract to hedge the currency risk O Long position in forward contract O Short position in forward contract b. Calculate the no-arbitrage price at which you could enter into a forward contract that expires in 30 days. (Do not round intermediate calculations. Round your answer to 4 decimal places.) No-arbitrage price c. Move forward 10 days. The spot rate is $2.13. Interest rates are unchanged. Calculate the value of your forward position. (Do not round intermediate calculations. Round…
An American firm wants to borrow 100 million USD for 1 year to fund a capital investment project. The firm can borrow the money from a U.S. bank at an interest rate of 6%. Alternatively, the firm could borrow British pounds at a rate of 3% a year. At the end of the year, the firm would pay back the loan and interest. The initial exchange rate is 1 GBP = 2 USD. If at the end of the year the exchange rate changes from 1 GBP = 2 USD to 1 GBP = 3 USD, what was the actual cost of borrowing (effective interest rate) if the American firm chose to obtain the loan in British pounds?
Last year, your company sold electronic products to Brazil. You are expecting to receive Real 850,000 in 6 months. The following quotations are provided by a currency dealer: In $ Real 1 m. forward 3 m. forward per $ 2.3810 2.3753 0.4200 0.4210 0.4350 2.2989 6 m. forward 0.4115 2.4301 If you are completely confident that the spot rate in 6 months will be 0.4228, do you need to take a short or long position in Real forward contract?
Today is mid July. Your Australian company builds trucks and thus need to buy raw materials from China. You are tasked with buying some important Chinese raw materials in October 2017. The total amount that you are expected to pay (in October) is CNY100mil. The forward contact expiring in October 2017 is currently priced at AUD0.20/CNY. You decide to hedge the whole amount of CNY100mil against currency risk. Today, would you long or short the forward contract? And on which currency? Show what will happen in October 2017. Note: CNY is the currency denomination in China

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