Carson Case Study

Assignment 2 (38 points)

EMBA 540 International Finance

Spring 2016

1.  (10 points) FX Basics

1. (2 points) You observe the USD/EUR exchange rate at 1.10 today, while it was 1.40 several years ago. Which currency has appreciated, which has depreciated? By how much?

1. (2 points) Your Canadian friend owes you USD 100. The current USD/CAD exchange rate is at 0.80. You are OK with being paid in CAD. How many CAD do you request from your friend?

1. (2 points) If the JPY/EUR exchange rate is 118.00 JPY/EUR and it takes 42.00 THB (Thai Baht) to purchase one EUR, what is the price of a Baht expressed in Yen (i.e., JPY/THB rate)?

1. (2 points) Starbucks needs to make a payment of KES 480,000,000 to its Kenyan coffee supplier. Citibank quotes Starbucks a bid and ask of 79.00 – 82.00 KES/USD. What is the USD amount of the payment? Remember the rip-off rule.

1. (2 points) Last year, you invested USD 15,000 in a European Hedge Fund which is denominated in EUR. The fund’s performance has been OK, with a return (in EUR) of +10%. But the USD/EUR exchange rate went from 1.3700 a year ago to 1.3250 USD/EUR today. If you sold your investment today, how many USD would you be able to collect?

1. (8 points) Triangular Arbitrage

1. (2 points) You are given the following exchange rates, what is the implied rate for USD/EUR?

S(t,EUR/GBP) = 1.1950                

S(t,USD/GBP) = 1.5400

1. (4 points)  You are given the same rates as above. Another FX dealer offers you a rate for USD/EUR of 1.26. Is there a profit opportunity? Using the following figure, indicate all necessary transactions to answer this question. Assume for simplicity you have EUR 1 to invest. What is your return in %?

[pic 1]

1. (2 points)  If you had GBP 1 to invest (instead of EUR 1 as under b.), would your relative return (in %) be different compared to b.?

1. (10 points) Forward Contracts: Assume CIRP holds.

1. (2 points) You observe the following market conditions:

S(t, CHF/USD) = 0.9354

The 1-year USD interest rate is 1.00% p.a.

The 1-year CHF interest rate is 0.36% p.a.

What is the 1-year forward rate between CHF/USD, ?[pic 2]

1. (2 points) As before, you observe:

S(t, CHF/USD) = 0.9354

The 2- and 3-year USD interest rate is 1.00% p.a.

The 2-year CHF interest rate is 0.86% p.a, while the 3-year CHF interest rate is 2.64% p.a.

What are the following forward rates: , ?[pic 3][pic 4]