Sample Quiz 2 Solution

Sample Quiz 2 Solution - Version Fin 536 Sample Quiz 2...

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Version 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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Sample Quiz 2 Solution - Version Fin 536 Sample Quiz 2...

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