Get the plugin now. Help Preferences Sign up Log in. To view this presentation, you'll need to enable Flash. Foreign Exchange Derivative Markets. What is the value of the euro in Canadian dollars? Assume the following 1. Interest rate on borrowed euros is 5 percent annualized 2. Interest rate on dollars loaned out is 6 percent annualized 3. Spot rate is 0. Expected spot rate in ten days is 0. Zena Bank can borrow 10 million Describe the steps Zena should take to profit from shorting euros and going long on dollars.
Borrow 10 million and convert to 11,, 2. Invest the 11,, million for ten days at 6 percent annualized or. After ten days, convert the 11,, into euros at the existing spot rate, which converts to 10,, 4. Pay back the loan of 10 million plus interest of 5 percent annualized. What is the forward rate premium? The spot rate for the euro is 1.
The price of a futures contract is 1. Expectation of euros spot rate as of the settlement date is 1. You could buy euro futures. You would receive euros on the settlement date for 1.
To account for uncertainty, you could also develop a probability distribution for the future spot rate. A call option is available with an exercise price of 1. You could euro call options. If your expectations are correct, you will net 1. An arbitrageur could conduct locational arbitrage by purchasing euros from Blythe Bank for 1. What should the forward rate premium or discount of the British pound be? The forward rate reflects a 0. Whether your application is business, how-to, education, medicine, school, church, sales, marketing, online training or just for fun, PowerShow.
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