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Fin 536 Sample Quiz 2 Solutions
Name_________Section_4pm/7pm
1.
Fill out the answers.
a.
Henry borrows $10000 at an interest rate i
$
=2%; converts it into euro at
the current spot rate S($/€)=1.32; deposits the funds in a European savings
account for a year at interest rate of
i
€
=3.4%. At the end of year, Henry
converts his revenue in Europe back into dollars at the spot rate S
1
($/€).
Compute his net profit in the following scenarios. If the spot rate is
S
1
($/€)=1.25, the net profit/loss is $___408.33__
____. If the spot rate
S
1
($/€)=1.45, the net profit/loss is $____1158.33
_____.
b.
Three banks are quoting the following rates: Citibank quotes $1.52/£;
UBS quotes €1.30/£; Deutsche Bank quotes $1.45/€. If you start with
$1000, you profit will be $____240.13____
___ from arbitrage. The
direction of arbitrage implies _____buying__
_______ (buying/selling) €
from/to UBS.
c.
You enter to buy €125,000 forward delivered in 6 months. The forward
price is F
6
($/€)=1.34. If the spot rate at the maturity is $1.30/€, you have
a
____loss
____ (profit/loss) of $_____5000
________.
d.
The Expectations Hypothesis implies __ zero _
_(negative/zero/positive)
profit on average in the forward trading.
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 Fall '11
 Staff
 Interest, Interest Rate

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