9/6/2015
HW2 Assignment
FIN465 – Chapters 4,5 Instructor: Dr. Blaise Roncagli
You may use your book and notes when working on these problems, and you may work in groups with others, but the final product that you submit for grading must be your own work. Follow the instructions provided in this handout very carefully. Failure to follow instructions may result in loss of points.
Chapter 4 Problems
4.1 Assume the spot rate of the British pound is $1.6610. The expected spot rate one year from now is assumed to be $1.5500. What percentage change does this reflect? Does the pound appreciate or depreciate? 4.2
ANSWER: ($1.5500 – $1.6610)/$1.6610 = –6.683% Depreciation
Gigantic Bank expects that the Singapore dollar will depreciate against the dollar from its spot rate of $.46 to $.44 in 90 days. The following interbank lending and borrowing rates exist: (Note: these are annual rates, not 90 day rates.)
Lending Rate U.S. dollar 8.0% Singapore dollar 23.0%
Borrowing Rate 8.3%
25.5%
Gigantic Bank considers borrowing 10 million Singapore dollars in the interbank market and investing the funds in dollars for 90 days. Estimate the profits (or losses) that could be earned from this strategy. Should Gigantic Bank pursue this strategy? ANSWER: Borrow S$10,000,000 and convert to U.S. $: S$10,000,000 × $.46 = $4,600,000 Invest funds for 90 days. The rate earned in the U.S. for 90 days is: 8% × (90/360) = 2.00%
Total amount accumulated in 90 days:
$4,600,000 × (1 + .0200) = $4,692,000 Convert U.S. $ back to S$ in 90 days: $4,692,000/$.44 = S$10,663,636 The rate to be paid on loan is: .255 × (90/360) = .06375
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Amount owed on S$ loan is: S$10,000,000 × (1 + .06375) = S$10,637,500 This strategy results in a gain: S$10,663,636 – S$10,637,500 = S$26,136 Gigantic Bank should pursue this strategy.
4.3 General Instruments