Problem 7.

7 Takeshi Kamada -- CIA Japan

Takeshi Kamada, a foreign exchange trader at Credit Suisse (Tokyo), is exploring covered interest arbitrage
possibilities. He wants to invest $5,000,000 or its yen equivalent, in a covered interest arbitrage between U.S.
dollars and Japanese yen. He faced the following exchange rate and interest rate quotes.

Assumptions Value Yen Equivalent

Arbitrage funds available $5,000,000 593,000,000
Spot rate (¥/$) 118.60
180-day forward rate (¥/$) 117.80
180-day U.S. dollar interest rate 4.800%
180-day Japanese yen interest rate 3.400%
nterest arbitrage
age between U.S.
Problem 7.8 Takeshi Kamada -- UIA Japan

Takeshi Kamada, Credit Suisse (Tokyo), observes that the ¥/$ spot rate has been holding steady, and both dollar
and yen interest rates have remained relatively fixed over the past week. Takeshi wonders if he should try an
uncovered interest arbitrage (UIA) and thereby save the cost of forward cover. Many of Takeshi's research
associates -- and their computer models -- are predicting the spot rate to remain close to ¥118.00/$ for the
coming 180 days. Using the same data as in the previous problem, analyze the UIA potential.

Assumptions Value Yen Equivalent

Arbitrage funds available $5,000,000 593,000,000
Spot rate (¥/$) 118.60
180-day forward rate (¥/$) 117.80
Expected spot rate in 180 days (¥/$) 117.00
180-day U.S. dollar interest rate 4.800%
180-day Japanese yen interest rate 3.400%
Problem 7.18 East Asiatic Company -- Thailand

The East Asiatic Company (EAC), a Danish company with subsidiaries all over Asia, has been funding its Bangkok subsidiary
primarily with U.S. dollar debt, because of the cost and availability of dollar capital, as opposed to with Thai baht-denominated (
debt. The treasurer of EAC-Thailand is considering a one-year bank loan for $250,000. The current spot rate is B32.06/$, and the
dollar-based interest is 6.75% for the one year period. One year loans are 12.00% interest in baht.

a. Assuming expected inflation rates of 4.3% and 1.25% in Thailand and the United States, repectively, for the coming
year, according to purchasing power parity, what would the effective cost of funds be in Thai baht terms?

b. If EAC's foreign exchange advisers believe strongly that the Thai government wants to push the value of the baht
down against the dollar by 5% over the coming year (to promote its export competitiveness in dollar markets), what
might the effective cost of funds end up being in baht terms?

c. If EAC could borrow Thai baht at 13% per annum, would this be cheaper than either part (a) or part (b) above?
Assumptions Value
Current spot rate, Thai baht/$ 32.06
Expected Thai inflation 4.300%
Expected dollar inflation 1.250%
Loan principal in U.S. dollars $250,000
Thai baht interest rate, 1-year loan 12.000%
US dollar interest rate, 1-year loan 6.750%
 funding its Bangkok subsidiary
d to with Thai baht-denominated (B)
rent spot rate is B32.06/$, and the
ht.

ectively, for the coming

aht terms?

the value of the baht

dollar markets), what

or part (b) above?

Problem 8.1 Amber McClain

Amber McClain, the currency speculator we met earlier in the chapter,sells eight June futures contracts for
500,000 pesos at the closing price quoted in Exhibit 8.1.

a. What is the value of her position at maturity if the ending spot rate is $0.12000/Ps?
b. What is the value of her position at maturity if the ending spot rate is $0.09800/Ps?
c. What is the value of her position at maturity if the ending spot rate is $0.11000/Ps?

a. b. c.
Assumptions Values Values Values
Number of pesos per futures contract 500,000 500,000 500,000
Number of contracts 8.00 8.00 8.00
Buy or sell the peso futures? Sell Sell Sell
Problem 8.3 Ventosa Investments

Jamie Rodriguez, a currency trader for Chicago-based Ventosa Investments, uses the following futures quotes on the British pou

British Pound Futures, US$/pound (CME)

Maturity Open High Low

March 1.4246 1.4268 1.4214
June 1.4164 1.4188 1.4146

a. If Jaime buys 5 June pound futures, and the spot rate at maturity is $1.3980/£, what is the value of her position?
b. If Jamie sells 12 March pound futures, and the spot rate at maturity is $1.4560/£, what is the value of her position?
c. If Jamie buys 3 March pound futures, and the spot rate at maturity is $1.4560/£, what is the value of her position?
d. If Jamie sells 12 June pound futures, and the spot rate at maturity is $1.3980/£, what is the value of her position?

a) b) c)
Assumptions Values Values Values
Pounds (₤) per futures contract £62,500 £62,500 £62,500
Maturity month June March March
Number of contracts 5 12 3
Did she buy or sell the futures? buys sells buys
 futures quotes on the British pound (£) to speculate on the value of the pound.

Contract = 62,500 pounds

Open
Settle Change High Interest
1.4228 0.0032 1.4700 25,605
1.4162 0.0030 1.4550 809

alue of her position?

e value of her position?
value of her position?
value of her position?

d)
Values
£62,500
June
12
sells
Problem 8.5 Blade Capital (A)

Christoph Hoffeman trades currency for Blade Capital of Geneva. Christoph has $10
million to begin with, and he must state all profits at the end of any speculation in U.S.
dollars. The spot rate on the euro is $1.3358/€, while the 30-day forward rate is
$1.3350/€.

a. If Christoph believes the euro will continue to rise in value against the U.S. dollar, so
that he expects the spot rate to be $1.3600/€ at the end of 30 days, what should he do?

b. If Christoph believes the euro will depreciate in value against the U.S. dollar, so that
he expects the spot rate to be $1.2800/€ at the end of 30 days, what should he do?

a. b.
Assumptions Values Values
Initial investment (funds available) $10,000,000 $10,000,000
Current spot rate (US$/€) $1.3358 $1.3358
30-day forward rate (US$/€) $1.3350 $1.3350
Expected spot rate in 30 days (US$/€) $1.3600 $1.2800
Problem 8.6 Blade Capital (B)

Christoph Hoffeman of Blade Capital now believes the Swiss franc will appreciate versus the
U.S. dollar in the coming three-month period. He has $100,000 to invest. The current spot rate is
$0.5820/SF, the three-month forward rate is $0.5640/SF, and he expects the spot rates to reach
$0.6250/SF in three months.

a. Calculate Christoph's expected profit assuming a pure spot market speculation strategy.
b. Calculate Christoph's expected profit assuming he buys or sells SF three months forward.

a. b.
Assumptions Values Values
Initial investment (funds available) $100,000 $100,000
Current spot rate (US$/Swiss franc) $0.5820 $0.5820
Six-month forward rate (US$/Swiss franc) $0.5640 $0.5640
Expected spot rate in six months (US$/Swiss franc) $0.6250 $0.6250