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2.
Solution: The bond cost $987.65 / $1.75 £564.37.
At maturity, the $1,000 is worth $1,000 / $1.83 £546.45.
The holding period return is (546.45 564.37)/564.37 0.0317.
3.
Solution: The price of each share is $93.00 / $0.68 136.76 Canadian dollars.
The dividend is $0.72 / $0.71 1.014 Canadian dollars
The sale price is $100.25 / $0.71 141.20 Canadian dollars
The return (141.20 1.014 136.76) / 136.76 0.03988
4.
Solution: % change in currency (0.85 – 0.93) / 0.93 0.086
Total investment return 0.02 (0.086) 0.1060 , which is equal to 10.60%
5.
6.
Solution: Spot rate 1.28 (1 / 0.62) 2.0645 Canadian dollars / pound
2
7.
Solution: Complete the following transactions simultaneously:
a. Exchange $1.00 into 1.36 New Zealand dollars.
b. Exchange the 1.36 New Zealand dollars into 0.6664 British pounds.
(Note 1.36 * 0.49 = 0.6664)
c. Exchange the 0.6664 British pounds into $1.0748. (Note : 0.6664 / 0.62 = 1.0748 )
d. This yields a riskless $0.0748.
8.
Solution: % Change (1.16 – 0.90) / 0.90 28.88%
The Euro has appreciated by 28.88%
9.
Solution: Rate 1 / 0.375 $2.67 / real
10.
Solution: Expected rate 10 (1.23 / 1.02) 12.059 pesos per dollar.
11.
Solution: use the formula : (id - if) = (SR / FR ) - 1
where FR is the forward exchange rate and SR is the spot exchange rate, and id is the domestic interest
rate and if is the foreign country’s interest rate.
So, if current U.S. rates are 5%, the rates in England are 0.05 0.01955 0.06955 6.95%
12.
Solution: (X 120) / 120 0.10, so X 108 yen per dollar.
3
13. Solution:
The current exchange rate would change by £0.55 / $ 25% £0.1375 / $,
Hence, the new exchange rate will be £0.6875 / $ ( Note : 0.55 + 0.1375 = 0.6875)
15.
Solution: use the formula : (SR / FR) = ( 1 + id ) / (1 + if )
where FR is the forward exchange rate and SR is the spot exchange rate, and id is the domestic interest
rate and if is the foreign country’s interest rate.
(SR / FR) = ( 1 + id ) / (1 + if )
(SR / FR) = ( 1 + id ) / (1 + if ) = > FR = SR * ( 1 + if ) / (1 + id )
FR = [120 * (1 + 0.02) ] / (1 + 0.04)
FR = [120 * (1.02)] / 1.04
FR = 117.69 Yen / $
16.
Solution:
a. Borrow $1.00 at 4%. You will owe $1.04 at the end of the period.
b. Exchange the $1.00 into ¥120, and lend it at 2%. You will have ¥122.40. (Note : 120 * 1.02 = 122.40)
c. Enter into the forward agreement.
d. At the end of the period, convert the ¥122.40 into dollars at ¥115 / $1.00
You will acquire 1.0643 $ (Note : 122.40 / 115 = 1.0643)
e. Pay the $1.04 you owe. This leaves $0.0243. (Note : 1.0643 – 1.0400 = 1.0243)
4
17.
Solution: use the formula : (SR / FR) = ( 1 + id ) / (1 + if )
where FR is the forward exchange rate and SR is the spot exchange rate, and id is the domestic interest
rate and if is the foreign country’s interest rate.
(SR / FR) = ( 1 + id ) / (1 + if )
Solve for if ;
if = 0.1440 ;
if = 14.40 %