1Extra Practice SolutionsQuestion 1(a) Since Samuel expects the Singapore dollar to appreciate against the U.S. dollar, he should buy a call onSingapore dollars.(b) Samuel’s gross profit, if the spot rate is $0.7000/S$, will be $0.7000-$0.6500 = $0.05000. His net profitwould be $0.05000-$0.00046 = $0.04954.Question 2If the actual exchange rate is different from the predicted exchange rate, the competitiveness will be affected.Therefore, need to see if the real exchange rate (E) is 1 or not.PPPttSSE11+ +=To calculate SPPP need to use the PPP formula( )
StPPP 1 Won
(1 0 . 04
) = Won215 / $
+=172 / $× 1+ + 0.301215215E = =Since E = 1, competitiveness is unaffected. The change in exchange rate is exactly offset by changes in inflation.Question 3(a) They need pounds in three months to pay the construction bill – therefore need to buy poundsforward.Buy £525,000 forward @ F3 month = 1.6800/£ (Buy at the ask price – as the dealer will sell £)= £525,000 * 1.6800/£ = $882,000(b) Note: the UK money market interest rates are 6%-7.5% i.e. you invest/lend at the rate of 6% p.a.while you borrow at the rate of 7.5% p.a.(Explanation: Remember the strategy for a money market hedge is borrow, convert, invest. They wantto receive GBP from the money market hedge so they can pay the payable in three months. So theyneed to borrow USD, convert to GBP, invest in GBP). The strategy would look like this:
CF0
CF1
Borrow PV of GBP525000 in USD
= (525000/(1.015)*1.65
USD
853,448.28
-853448.28*(1+ius)
Convert to GBP
USD
-853,448.28
853448/1.65
GBP
517,241.21
Invest in GBP
517241*1.015
GBP
– 517,241.21
525,000
Pay GBP payable
GBP
– 525,000
Net CFs
USD
0
2For Amazon to be indifferent between the money market hedge and the forward, then853448.28(1+ius) = $882,000Therefore ius=0.0335 per quarter = 13.4% p.a. compounded quarterly(c) i. Amazon should buy a call on £ since it has to buy £525000 in three months.ii. Option cost = S0 * 525,000 * 0.02 = 1.65 * 525,000 * 0.02 = $17,325FV = ($17,325) (1 + 0.08/4) = $17,671.50Maximum Cost if Amazon buys a call at X = 1.65 is£525,000 * 1.65 ( = 866,250) + 17,671.50 = $883,921.50iii. If ST = 1.55, the call will not be exercised. Amazon will buy GBP on the spot market. Payment willcost Amazon£525,000 * 1.55 ( = 813,750) + 17,671.50 = $831,421.50Question 4• Equity shares on foreign markets – Buy stock listed on foreign markets. Will incur highertransaction costs, need to purchase foreign exchange, a custodian to house certificates, bankaccount to collect and repatriate dividends and subject to the settlement mechanisms in thehome country. Also need to be informed about rights issues and other matters.• ADRs – They are denominated in US dollars and trade on a US exchange. These receiptsrepresent ownership in stocks that are held in custody in their home market.• Closed-end country funds – They issue a fixed number of shares against an initial capitaloffering. These are funds that trade on a secondary market (an exchange) and consequentlyhave two prices and trade at a premium or discount relative to their Net Asset Value. Thesetraditionally are single-country funds.• Open-end foreign stock funds – These are mutual funds whose underlying assets areinternational stocks. These include global funds; international funds; regional funds and singlecountry funds.3Question 5b.Question 6
What Students Are Saying About Us
.......... Customer ID: 12*** | Rating: ⭐⭐⭐⭐⭐"Honestly, I was afraid to send my paper to you, but splendidwritings.com proved they are a trustworthy service. My essay was done in less than a day, and I received a brilliant piece. I didn’t even believe it was my essay at first 🙂 Great job, thank you!"
.......... Customer ID: 14***| Rating: ⭐⭐⭐⭐⭐
"The company has some nice prices and good content. I ordered a term paper here and got a very good one. I'll keep ordering from this website."
