You have the following quotations and expectations for the British pound: Present spot rate $1.3200/£ Six-month forward rate $1.3500/£ Six-month call option on pounds at a strike price of $1.32 and a premium of 4 cents per pound on the Philadelphia Stock Exchange. Your expectation for the spot rate in six months $1.3700/£ (a) Assume you have $5,000,000 with which to speculate. Ignore transaction cost, taxes, and interest that might be earned on idle cash balances. (b) If your expectations prove correct, what would be your dollar profit from speculating in the spot market? ) (c) What risks are associated with this operation?

You have the following quotations and expectations for the British pound: Present spot rate $1.3200/£ Six-month forward rate $1.3500/£ Six-month call option on pounds at a strike price of $1.32 and a premium of 4 cents per pound on the Philadelphia Stock Exchange. Your expectation for the spot rate in six months $1.3700/£ (a) Assume you have $5,000,000 with which to speculate. Ignore transaction cost, taxes, and interest that might be earned on idle cash balances. (b) If your expectations prove correct, what would be your dollar profit from speculating in the spot market? ) (c) What risks are associated with this operation?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter22: International Financial Management

Section: Chapter Questions

Problem 2P

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Suppose the spot price of the British pound is currently $1.50. If the risk-free interest rate on one-year government bonds is 4% in the United States and 3% in the United Kingdom, what must the forward price of the pound be for delivery one year from now? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
6. You are considering purchasing $20,000 worth of British pound denominated CDs. The current exchange rate is, 1 = $1.60. You plan on investing for six months. According to current forecasts, in six months time the exchange rate should be, 1 = $1.55. You desire a true 7% APR. What is the minimum pound CD APR you would require to make the investment (to the nearest basis point)?
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