DK Investment Co is a US firm that executes a carry trade in which it borrow euros (where interest rates are presently low) and invests in British pounds (where interest rates are presently high). DK Investment uses $100,000 of its own funds and borrow an additional euro 600,000. It will pay 0.5% on its euro borrowed for the next month and will earn 1.0% per month on funds invested in UK (British pounds). Assume the euro spot rate is $1.3/euro, British pound's spot rate is $1.8/bp (so pounds is worth 1.38 euro) and after one month, the FX rates will be the same. What will be DK Investment Net US$ profit from this carry trade investment? O around $4,598 O around $4,900 O around $4,912 O around $4,376

DK Investment Co is a US firm that executes a carry trade in which it borrow euros (where interest rates are presently low) and invests in British pounds (where interest rates are presently high). DK Investment uses $100,000 of its own funds and borrow an additional euro 600,000. It will pay 0.5% on its euro borrowed for the next month and will earn 1.0% per month on funds invested in UK (British pounds). Assume the euro spot rate is $1.3/euro, British pound's spot rate is $1.8/bp (so pounds is worth 1.38 euro) and after one month, the FX rates will be the same. What will be DK Investment Net US$ profit from this carry trade investment? O around $4,598 O around $4,900 O around $4,912 O around $4,376

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Brexylite plc is due to pay €1,750,000 to its European suppliers in 3 months’ time. The financial manager has decided to hedge the currency risk of this account payable. The following information has been provided by the company’s bank: Spot rate (£ per €): 1·1410 ± 0·0022 3 months forward rate (£ per €): 1·1574 ± 0·0041 6 months forward rate (£ per €) 1.1582 ± 0.0032 Calculate the expected (£) Stirling payment if the 3 months forward market is used
Zongo Industrial Banks, a U.S. bank, has 1-year U.S. $300 million loan that earns an average rate of return of 6%. Forrest Gump Bank also has one year single payment Euro loans of €110 million earning 8%. Forrest Gump Bank's funding source is $400 million in US$ one year NCDS, on which they are paying 4%. Initially the exchange rate is €1.10 per $1 U.S. The one year forward rate is €1.14 per $1 U.S. What is the bank's dollar % spread if they hedge fully using Euro forwards? Note: For this questions, you MUST show detailed calculation as we did in the class. That is, show the formula and substitution.
Smart banking corp can borrow $5 million at 6 percent annualized.it can use the proceeds to invest in Canadian dollars at 9 percent annualized over a 6-day period. The canadian dollar is worth $.95 and is expected to be worth $.96 in 6 days. Based on this information, should smart banking corp. Borrow U.S dollars and invest in Canadian dollars? What would be the gain or loss in U.S dollars?
Newstar Co. expects to pay 500,000 euro in one year. Assume the annual interest rate of borrowing or lending euro is 1% and the annual interest rate of borrowing or lending U.S. dollar is 2%. The spot rate of euro is $1.12 per euro. How much guaranteed amount of U.S. dollar does the company expect to pay after hedging the euro payable transaction in the international money market? (pick the closest answer) A. 565,545 USD. B. 554,510 USD. C. 562,786 USD. D. 576,912 USD.
XYZ Corporation, located in the United States, has an accounts payable obligation of ¥1500 million payable in six months to a bank in Tokyo. The current spot rate is ¥116/$1.00 and the six month forward rate is ¥109/$1.00. The annual interest rate is 3 percent in Japan and 6 percent in the United States. a) What is the future dollar cost of meeting this obligation using the money market hedge a. $92,307. b. $ 19582168.89 c. $13054779.26 d. $ 6589854.111
McDougan Associates (USA). McDougan Associates, a US-based investment partnership, borrows €90,000,000 at a time when the exchange rate is $1 3492/E. The entire principal is to be repaid in three years, and interest is 6.450% per annum paid annually in euros The euro is expected to depreciate vis-à-vis the dollar at 2.7% per annum. What is the effective cost of this loan for McDougan? outflow (Round the amount to the nearest whole number and the exchange rate to four decimal places) Year 11 Year 2 Proceeds from borrowing euros Interest payment due in euros Repayment of principal in year 3 Total cash flow of euro-denominated debt Year 0 €90,000,000 € ETTE 13492 (5.805.000) € (5,805,000) € 90,000.000 (5,805,000) (5,805,000) 13128 Expected exchange rate, S Dollar equivalent of euro-denominated cash flow $121.426.000 (7.620.804) $ (7.415.307) $ (119,076,034) What is the effective cost of this loan for McDougan? (Round to two decimal places) Year 3 1.2774 (5,805,000) (90,000,000) 95,005,000…
Yankee Company Ltd is a US. based company that has plans to borrow EUR 10 million to fund increased working capital to boost sales of is product in Europe. The company expects Euro interest rates lo rise so it enters into a 3X9 Forward Rate Agreement (FRA) to lock in the interest rate it will pay on is Euro borrowing. The current borrowing rate on the contract date is 3.5%. The borrowing rate on the settlement date rises to 3.8% Required: a) Calculate the amount that Yankee Co needs to pay lo settle the FRA on the settlement date b) Yankee Co management subsequently decides to extend its Euro borrowings for a year as its increased working capital in Europe has increased sales and profits. Yankee's main bank which funds its European operations offers it a one-year loan of Euro 10 million at a floating rate of interest of one-year Euro Interbank Offered Rate (Euribor) plus 3.5%. Yankee Co prefers to pay a Bred rate of 3 25%. It enters into a swap agreement with a counter-party to…
McDougan Associates (USA). McDougan Associates, a U.S.-based investment partnership, borrows €80,000,000 at a time when the exchange rate is $1.3460 = €1.00. The entire principal is to be repaid in three years, and interest is 6.250% per annum, paid annually in euros. The euro is expected to depreciate vis-à-vis the dollar at 3% per annum. What is the effective cost of this loan for McDougan?
FDI Ltd is a UK-based firm that earns revenue from financial investments in the US. It has invested $8 in a US bank for a fixed term of 1 year. The US interest rate is 10% per year. The 1-year forward rate is F = 21 pounds per dollar. If FDI Ltd enters into the forward contract, how many pounds will it get for its dollars in one year's time? State your answer as a number of pounds to 1 decimal place.
Suppose that California Co., a U.S. based MNC, seeks to capitalize a difference in interest rates between euros and British pounds via the use of a carry trade. In particular, after 1 month, funds invested in euros will yield a 0.50% percent return, while funds invested in pounds will yield a return of 2.00% percent. Currently the spot rate of the British pound is $1.00 while the spot rate of the euro is $0.80. In other words, the pound is worth 1.25 euros. California Co. expects these spot rates to remain constant over the next month. After repaying their euro loan, California Co. has 211,200 pounds remaining. Assume that the exchange rate is still $1.00 per pound. These pounds are equivalent to $ , which represents a profit of $ over the initial $200,000 that California Co. used from their own funds.
Suppose that California Co., a U.S. based MNC, seeks to capitalize a difference in interest rates between euros and British pounds via the use of a carry trade. In particular, after 1 month, funds invested in euros will yield a 0.50% percent return, while funds invested in pounds will yield a return of 2.00% percent. Currently the spot rate of the British pound is $1.00 while the spot rate of the euro is $0.80. In other words, the pound is worth 1.25 euros. California Co. expects these spot rates to remain constant over the next month. After 1 month, California Co. now has 693,600 pounds after investing their converted pounds. However, it is now time for California Co. to repay the 600,000 euro loan. If California Co. borrowed these euros at the prevailing rate of 0.50% percent, they must repay a total of rate of 1.25, this repayment is equivalent to pounds. euros. At the cross pounds. Thus, after repaying the loan, California Co. will have
Suppose that California Co., a U.S. based MNC, seeks to capitalize a difference in interest rates between euros and British pounds via the use of a carry trade. In particular, after 1 month, funds invested in euros will yield a 0.50% percent return, while funds invested in pounds will yield a return of 2.00% percent. Currently the spot rate of the British pound is $1.00 while the spot rate of the euro is $0.80. In other words, the pound is worth 1.25 euros. California Co. expects these spot rates to remain constant over the next month. If California Co. takes $200,000 of its own funds and converts them to pounds it would have 600,000 euros and converts them to pounds, it will have pounds. pounds. If California Co. borrows

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