Homework Assignment #1 General Instructions: ? I require from all graduate students to use Excel in this class. All HW submissions must be done using Microsoft Excel. ? Reviewing the Excel samples that contain solutions to textbook problems will make it easier to solve the HW problems. Notes when using Excel: ? Include your name in the file. It can be in a title page or in each sheet. ? DonΒt use Excel as a word processor. You have to use Excel to actually calculate numeric results. Nevertheless, to show the procedure used, please identify the names of your variables (both input and output). ? ghlight or put a box around your main answers and email the Excel file you prepared. ? Use one sheet for each chapter Chapter 2 1. An MNC converts USD 400,000 into BRL 765,000. Assume zero commissions and fees. a. What is the BRLUSD exchange rate? b. What is the USDBRL exchange rate? 2. Consider the quotations in the following table offered by the Chong ng Bank of Hong Kong for currency transactions. Calculate the bid- ask spread (absolute and percent) and identify the least and most costly spread. In words, explain the significance of your findings. Currency Pair Bid Ask USDHKD 7.3601 7.3626 SGDHKD 4.9540 5.9580 EURHKD 11.9000 11.9050 JPYHKD 0.0635 0.0650 FINC 6367 Β International finance Homework 1 Page 2 3. An MNC wishes to sell EUR 1 million that it received from a French customer and obtain its domestic currency (USD). The following alternatives are available. Determine which bank provides the highest amount of USD. Bank Currency Pair Bid Ask Commission A EURUSD 1.3201 1.3204 USD 250 B EURUSD 1.3200 1.3205 USD 100 C USDEUR 0.7572 0.7576 USD 200 4. Assume that 180-day LIBOR equals 2.7 percent (actual/ 360 convention). Calculate the effective annual return. Also calculate the continuously compounded interest rate that will provide an equivalent annual return. 5. An MNC makes a Eurodollar deposit for 270 days and earns an effective annual return of 2.76 percent. What is the 270- day LIBOR (actual/ 360 convention)? Chapter 3 1. Duerbo Corporation entered into a forward contract to purchase CHF 5 million in six months at a rate of USD 0.9500. Two months later, CHF is trading at USD 0.9600, and a four- month CHF forward contract (maturing at the same time as the original six- month contract) is trading at U
SD 0.9700. At this time, what is the potential loss from default on the forward position? 2. Roland Enterprises has exposure to GBP because of its U. K. sales. It is considering the use of GBP futures to mitigate its risk. The companyΒs CFO is not confident that GBP futures are priced accurately in markets and assigns the task of futures pricing to his assistant, Mary Snead. Assume that LIBOR rates based on USD and GBP for six- month maturities are 2.35 percent and 4.98 percent, respectively. LIBOR conventions for these currencies are actual/ 360 and actual/ 365, respectively. Spot GBPUSD equals 1.6150. Calculate the benchmark rate for the six- month GBPUSD futures contract. 3. Rixon Corporation purchases CHF call options with a strike price of USD 0.9200. The option premium is USD 0.0215 per currency unit. A financial analyst at Rixon forecasts the following possible values for spot CHFUSD at maturity. Calculate option payoff and profit (per currency unit) for each of these spot values. Possible Value of CHFUSD Option Exercise (Y/ N) Payoff Profit 0.9000 0.9300 0.9600 FINC 6367 Β International finance Homework 1 Page 3 4. Shale Corporation purchases BRL put options with a strike price of USD 0.425. The option premium is USD 0.0159 per currency unit. A financial analyst at Shale forecasts the following possible values for spot BRLUSD at maturity. Calculate option payoff and profit (per currency unit) for each of these spot values. Possible Value of BRLUSD Option Exercise (Y/ N) Payoff Profit 0.400 0.425 0.450 5. Options on GBP trade on the Philadelphia Stock Exchange. A call expiring in three months with a strike price of USD 1.6000 is trading at a price of USD 0.0251. Consider an investor who buys five contracts and holds the options to maturity. At maturity, GBP is trading at USD 1.6315. Assume contract size is 10,000 currency units. What is the net profit for the person who sold the five contracts? 6. Determine the value of a call option on the JPY that has the following characteristics: (a) is a European type, (b) matures in nine months, and (c) has the strike price of USD 0.0110. In the spot market, the JPY is trading at USD 0.0094. The U. S. and Japanese interest rates are 3 percent and 1 percent, respectively (continuous compounding). The JPY has an annual standard deviation of 13 percent.