A foreign exchange dealer with standard bank

Reference no: EM131050575

Question 1

1.1 Grace Moogzt is a foreign exchange dealer with Standard Bank. She notices the following quotes.
Spot exchange rate R12.5123/USS
One year forward exchange rate R12.3214/USS
One year USD interest rate 8.5% p.a.
One year Rand interest rate 11.5% p.a.

a. Is the interest rate parity holding? You may ignore transaction costs.

b. Show that an arbitrage opportunity exists.

c. Calculate the arbitrage profit that can be made assuming that Grace Moogzt is authorised to work with US$2 000 000 or the Rand equivalent. Show all the steps that need to be taken to make arbitrage profit.
1.2A call option allows the holder to buy US$200 000 at an exercise exchange rate of 1.6000 (AUDIUSD). If the premium paid is 5 Australian cents for each USD. calculate the net payoff at the following spot exchange rates:

(i) 1.7240 121
(ii) 1.8150 121
(iii) 1.5365 121
(iv) At what exchange rate will the holder break even?

Question 2

2.1 The time from acceptance to maturity on a US$1 000 000 banker's acceptance (BA) is 120 days. The importer's bank's acceptance commission is 1.75% and the market rate for 120-day BAs is 5.75%. Assume that there are 360 days in a year. You are required to determine the following:

(a) The proceeds the exporter will receive if he holds the BA until maturity.
(b) The acceptance commission paid to the importers bank.
(c) The proceeds the exporter receives if he discounts the NA
(d) The all-in-rate (interest rate) the bank receives and the bond equivalent yield the importer's bank will earn from discounting the BA with the exporter.
(e) If the exporters opportunity cost of capital is 10%, should he discount the BA or hold it to maturity?

2.2A put option allows the holder to sell NOK400 000 at an exercise exchange rate of 0.2540 (AUD/NOK). If the premium paid is 0.7 Australian cents for each NOK. calculate the net payoff

at the following spot exchange rates:

(i) 0.2410

(ii) 0.2786

(iii) 0.1856.

(iv) At what exchange rate will the holder break even?

ASSIGNMENT 02

Due date: 23 SEPTEMBER 2016

Unique number: 710573

Answer the following questions on the answer book and submit your assignment through myUnlsa

Question 1

A U.S. multinational company is considering whether to borrow British Pounds for one year. It finds that the quoted interest rate for the British Pounds is 10 percent and the quoted rate for the U.S. dollar is 16 percent. It then develops a probability distribution for the British Pound's possible percentage change in value over the life of the loan as follows:

Possible rate of change in the British Pound over the life of the loan	Probability of occurrence
-5%	10%
-2%	15%
-1%	5%
+1%	20%
+3%	15%
+5%	10%
+7%	15%
+10%	10%

(a) Calculate the effective financing rate for every possible rate of change in the British

Pound if it does occur.

(b) Determine the expected financing rate of the British Pounds

Question 2

ABC LTD. a U.K. multinational enterprise is contemplating making a foreign capital expenditure in South Africa. The initial cost of the project is ZAR50 million. The annual cash flows over the five year ennnnmin life of the prnjenl are ARtirrIAMel to h 7A1:21:1 million. 7AP1A million.

million. ZAR10 million. and ZAR9 million. The parent firm's cost of capital in pounds is 7.5 percent. Long-run inflation is forecasted to be 4 percent per annum in the U.K. and 12 percent in South Africa. The current spot foreign exchange rate is ZAR/E = 15.56. Determine the NPV for the project in E by:

(a) Calculating the NPV in ZAR using the ZAR equivalent cost of capital according to the Fisher Effect and then converting to E at the current spot rate.

(b) Converting all cash flows from ZAR to E at Purchasing Power Parity forecasted exchange rates and then calculating the NPV at the pound cost of capital.

(c) What is the NPV in pounds if the actual pattern of ZARJE exchange rates is: S(0) = 15.56. S(1) = 14.56. S(2) = 16.72. S(3) = 15.78. S(4) = 16.54. and S(5) = 16.32? Justify the difference in the actual and the forecasted NPV

Question 3

ABC Ltd would like to assess the country risk of South Africa. ABC Ltd has identified various political and financial risk factors, as shown below.

Political Risk Factor Assigned Rating Assigned Weight

Blockage of fund transfers 6 55%

Bureaucracy 2 45%

Financial Risk Factor Assigned Rating Assigned Weight

Interest rate 4 20%

Inflation 5 15%

Exchange rate 4 10%

Competition 3 30%

Growth 7 25%

ABC Ltd has assigned an overall rating of 75 percent to political risk (actors and of 25 percent to financial risk factors. The investment policy for ABC Ltd mentions that the company can only invest in a country if the country risk is below 4.5. Should ABC Ltd consider South Africa for investment?

Reference no: EM131050575

Questions Cloud

New accounting firm to provide more specialises advice : Your company,ABC partners, has been contacted via email by a prospective client(Dr. Paul Simmons-Simmons Medical Ptactice) who recently met at a networking function.

Why it is important for business survival : You are to research an actual business examples and the impact of IT on that business. Does business need IT? Why IT is important for business survival? What is required to apply IT into business

How to ship used machinery within the united states : How to ship used machinery within the United States? How to ship overseas? What documents are needed for shipping? Which export documents do we need if we ship to different countries?

Randomly drawn from the urn in succession : An urn contains 8 black and 9 green balls. Five balls are randomly drawn from the urn in succession, with replacement.That is, after each draw, the selected ball is returned to the urn. What is the probability that all 5 balls drawn from the ur..

A foreign exchange dealer with standard bank : c. Calculate the arbitrage profit that can be made assuming that Grace Moogzt is authorised to work with US$2 000 000 or the Rand equivalent. Show all the steps that need to be taken to make arbitrage profit.

Does this process have more or fewer control points : Does this process have more or fewer control points (regulated steps) than gluconeogenesis starting from pyruvate?

Prepare a business plan for renewal energy : Prepare a Business Plan for Renewal Energy. The business is about starting a renewable energy consulting firm that will provide engineering solutions for commercial businesses in the Boston area looking to save money and meet sustainability goals.

Recent and current research studies relevant to the study : This assignment requires that you prepare a research proposal of between 15 and 20 pages on a topic in your chosen area of research related to marketing strategy

How far below surface does fish appear person looking down : A fish lies 112 cm below the surface of a clear pond. If the index of refraction of water is assumed to be 1.33 and that of air is approximately 1, how far below the surface does the fish appear to a person looking down from above at an angle?

User Account

All Pages