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? Change in %: (1.5500 – 1.6610) / 1.6610 * (100) = -6.68%. The pound will depreciate because one pound can buy less USD if the future spot rate is accurate.

4.2 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 Borrowing Rate U.S. dollar 8.0% 8.3% Singapore dollar 23.0% 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?
1.) SGD 10,000,000*.46 = 4,600,000 USD
2.) $4,600,000*(1+(8%*(90/360)) = 4,692,000
3.) 10,000,000*(1+(25.5%*(90/360)) = 10,637,500 SGD
4.) SGD 10,637,500*.44 = 4,680,500
5.) $4,692,000 - $4,680,500 = $11,500 USD profit, they should pursue this strategy.

4.3 General Instruments expects that the pound will depreciate from $1.70 to $1.65 in one year. It has no money to invest, but it could borrow money to invest. It