Reference no: EM13836519

Question 1:

Suppose you work for XYZ Land-Citicorp in XYZ Land. A local bank wanted to buy USD50,000,000 three month forward. Since you think XYZ Land is a very risky environment you need to build 10% margin (annual) in your forward price to account for risk. Current spot and interest rates in USD and XYZ Land Lira are as follows.

What would be your forward quote?

XYZ currency/USD 685-700
RUSD: 7.50-8.50 p.a.
RXYZL: 35.00-45.00% p.a.

Question 2:

Use the following spot and interest rates to answer the following question:

USD/EURO 1.2310-1.2340

R-USD-3-months: 3.00%-3.25% pa

R-EUR-3-months: 4.00%-4.50% pa

Assume that you are a banker and you bought Eur100m forward based on the forward price calculated from rates available above. However, after you entered into the contract, you did not engage in the series of transactions that you supposed to (in order to create a risk free position).

In other words, you have a net exposure of EUR100m. Suddenly three months later Fed dramatically increased interest rates, which pushed the reference rates up by 2% in US. In response to interest rate hike, USD/EUR rate also moved down to: USD/EUR1.2050-1.2090. Concerned about further movements in the interest and exchange rates, you completed the loop by borrowing in Euros, converting them into USD and depositing dollars into an interest earning account (all with 9 months maturity).

What would be your net loss or gain with these sharp movements in interest rates, how much money would your bank loss or gain because of the forward contract you quoted based on the given rate?

Question 3:

A US company expects SFR120m cash flow 12 months from now. However the exact amount may vary +/-20%. Company develops an analysis to decide on the best hedging strategy.

They forecast that spot exchange rate can be either SFR1.2030 , 1.375 or 1.5470. They consider selling SFR 96m forward @1.375 and buying SFR48m put option @ strike price SFR1.375/$. They pay $0.0345 per SFR. Assume that actual cash flows turned out to be SFR120m. Calculate the net USD receipts if spot rate is SFR 1.5470/USD