What is exchange rate risk that jack is taking by engaging

Assignment Help Financial Management

Reference no: EM131461914

Jack is a foreign exchange trader for a bank in New York. He has $1 million (or Swiss franc equivalent) available to borrow and will then invest it in a short term money market investment. He is wondering whether he can make a CIA or UIA profit by borrowing in either the U.S. dollar or Swiss franc, and then investing in the other. He has the following data:

arbitrage funds available $1,000,000

spot exchange rate (SFr/$) 1.2810

3-month forward rate (SFr/$) 1.2740

expected spot rate in 90 days 1.2700

U.S. dollar 3-month interest rate 4.800% per annum

Swiss franc 3-month interest rate 3.200% per annum

1. Assess whether CIA profit is possible. Is there a CIA profit potential; if yes, what is it? Show your work. Which currency should Jack borrow in and which should he invest in? Why?

2. Given your conclusions for question 1, show how Jack can make profit (i.e. show how and what numbers you get for how much he would owe on borrowing in the one currency and how much he would make in investing in the other currency).

3. What is the exchange rate risk that Jack is taking by engaging in CIA?

Reference no: EM131461914

Questions Cloud

Calculate book value of asset : Genetic Insights Co. purchases an asset for $13,684. Calculate book value of an asset.

Common stock value-variable growth : Common stock value—Variable growth Lawrence Industries' most recent annual dividend

Profit margin must firm achieve in order to meet growth rate : What profit margin must the firm achieve in order to meet its growth rate goal?

What is the yield on the debt : Lewis, Schultz, and Nobel Development Corp. has an after-tax cost of debt of 5%. With a tax rate of 30%, what is the yield on the debt?

What is exchange rate risk that jack is taking by engaging : Jack is a foreign exchange trader for a bank in New York. What is the exchange rate risk that Jack is taking by engaging in CIA?

Compute price of the bonds based on semiannual analysis : You are called in as a financial analyst to appraise the bonds of Olsen’s Clothing Stores. Compute the price of the bonds based on semiannual analysis.

What is market value of the bond : A ten-year bond, with par value equals $1000, pays 7% annually. If similar bonds are currently yielding 8% annually, what is the market value of the bond?

Calculate the operating cash flow for year one : Calculate the operating cash flow for Year 1.

The purpose of this iLab is to create Access Reports : The purpose of this iLab is to create Access Reports. After a report is created, the student will sort the fields in different ways.

User Account

All Pages