Let r us be the annual risk free rate in the united

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16. Let R US be the annual risk free rate in the United States, R UK be the risk free rate in the United Kingdom, F be the futures price of $/BP for a 1-year contract, and E the spot exchange rate of $/BP. Which one of the following is true? A. if R US > R UK , then E > F B. if R US < R UK , then E < F C. if R US > R UK , then E < F D. if R US < R UK , then F = E E. There is no consistent relationship that can be predicted. if R US > R UK , then (1 + R US )/(1 + R UK ) > 1 and E < F. Difficulty: Difficult 17. Let R US be the annual risk free rate in the United States, R J be the risk free rate in Japan, F be the futures price of $/yen for a 1-year contract, and E the spot exchange rate of $/yen. Which one of the following is true? if R US > R J , then (1 + R US )/(1 + R J ) > 1 and E < F. Difficulty: Difficult Consider the following: 23-7
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Chapter 23 - Futures, Swaps, and Risk Management 18. What should be the proper futures price for a 1-year contract? 1.03/1.04(1.67 A$/$) = 1.654 A$/$. Difficulty: Moderate 19. If the futures market price is 1.63 A$/$, how could you arbitrage? E 0 (1 + r US ) - F O (1 + r A ); use the U.S. $ values for the currency: 0.5988(1.04) - 0.6135(1.03) = - 0.009153; when relationship is negative, action b will result in arbitrage profits. Difficulty: Difficult 23-8
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Chapter 23 - Futures, Swaps, and Risk Management 20. If the market futures price is 1.69 A$/$, how could you arbitrage? A. Borrow Australian Dollars in Australia, convert them to dollars, lend the proceeds in the United States and enter futures positions to purchase Australian Dollars at the current futures price. B. Borrow U.S. dollars in the United States, convert them to Australian Dollars, lend the proceeds in Australia and enter futures positions to sell Australian Dollars at the current futures price. C. Borrow U.S. dollars in the United States and invest them in the U.S. and enter futures positions to purchase Australian Dollars at the current futures price. D. Borrow Australian Dollars in Australia and invest them there, then convert back to U.S. dollars at the spot price. E. There is no arbitrage opportunity.
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