C18 P3 5 7 - Chapter 18 Problems 3, 5, 7 3. ...

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Unformatted text preview: Chapter 18 Problems 3, 5, 7 3. a. F180 = ¥100.01 (per $). The yen is selling at a premium because it is more expensive in the forward market than in the spot market ($0.009999 in six months versus $0.009963 today). F90 = $0.8084/C$. The U.S. dollar is selling at a discount because it is less expensive in the forward market than in the spot market (C$1.2370 in three months versus C$1.2379 today). The value of the dollar will fall relative to the yen, since it takes more dollars to buy one yen in the future than it does today. The value of the dollar will fall relative to the Canadian dollar, because it will take more US dollars to buy the Canadian dollar in the future than it does today. The cross rate in ¥/£ terms is: (¥106/$1)($1.51/£1) = ¥160.06/£1 The yen is quoted too high relative to the pound. Take out a loan for $1 and buy pounds: $1/($1.51/£1) = £0.66225 Use the £0.66225 to purchase yen at the cross ­rate, which will give you: £0.66225(¥165/£1) = ¥109.27152 Use the yens to buy back dollars and repay the loan. The cost to repay the loan will be: ¥109.27152 ($1/¥106) = $1.03086 Your arbitrage profit is $0.03086 per dollar used. b. c. 5. a. b. 7. If we invest in the U.S. for the next three months, we will have: $30,000,000(1.0047)3 = $30,424,991.21 If we invest in Great Britain, we must exchange the dollars today for pounds, and exchange the pounds for dollars in three months. After making these transactions, the dollar amount we would have in three months would be: ($30,000,000)(£0.68/$1)(1.0051)3/(£0.69/$1) = $30,019,876.11 We should invest in the US. ...
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