What was his continuous rate of return

Reference no: EM133376565

Question: (Currency Risk) Betty and Bob are interested in investing in the Freedonia Stock Market which requires investments to be purchased or sold in Freedonia dollars ($F). Hence there is a currency risk in addition to the stock market risk.

Currently one-year interest rates are 5% per annum continuous in the U.S and 12% per annum continuous in Freedonia. Currently the currency markets are such that you can buy $F 3 per $1, U.S. This is the spot price, 3.

a Compute the forward price of a 1 year forward contract. See Section 27 in your text for the relevant discussion. Be careful to be consistent in how you price one currency in terms of another.

b Bob has an account with $1000 (U.S.). He converts to $F and makes 15% continuous in one year in the Freedonia Stock Market. After this one year the currency price is now 4 that is $F 4 per $1 U.S. He converts back to U.S dollars at the rate of exchange. What amount (in U.S dollars) did he make or lose in the one year? What was his continuous rate of return?

c Betty does exactly the same except that in the beginning she sells a one year forward contract with forward price computed in part a. She makes 15% continuous in one year and converts back (all of the money) using the forward contract. What amount (in U.S. dollars) did she make or lose in the one year? What was her continuous rate of return?

Reference no: EM133376565

Questions Cloud

What hit mama and what did she understand that : What "hit" Mama? What did she understand that she had not understood a moment before? Does anyone else in the story have an epiphany?

What is your estimate of the current price per share : What is your estimate of the current price per share? Round your answer to two decimal places. Write out your answer completely

Do the results look useful and relevant to your topic : Write down the number of records that you retrieved from the first search. Do the results look useful and relevant to your topic? If so, how, if not, why not?

Why are 40-50% of the population not voting : Why are 40-50% of the population not voting? Is it lack of trust? Do people feel like they cannot make a difference? How do we build a democracy?

What was his continuous rate of return : He converts back to U.S dollars at the rate of exchange. What amount (in U.S dollars) did he make or lose in the one year? What was his continuous rate of retur

What might be the effective cost of funds in baht? terms : FIN 336 Southern New Hampshire University what might be the effective cost of funds in baht? terms? c. If EAC could borrow Thai baht at 13.00?% per? annum

What do all these music videos say to you about post-soviet : What do all these music videos "say" to you about post-Soviet, 21st century Russia? Do you have 1-2 general observations drawing on all of them?

What would you do as a teacher to make these parents more : What would you d0 as a teacher to make these parents more comfortable so that they would be willing and able to help their children with their literacy

Write a summary about the level of customer services : FIN 4003 Lambton College write a summary (facts, analysis, and conclusion) about the level of customer services provided by these bank staff. It is important

User Account

All Pages