question
jamallsingleton
TemplateforChapters56and7.xlsxSheet3
| Assignment Template for Chapters 5, 6, and 7 | |||||||||||||||||||||||||||
| Chapter 5 | |||||||||||||||||||||||||||
| Problem 5.6 Moscow to Tokyo | This is the essentially the same problem as 5.2 in the 16th edition | ||||||||||||||||||||||||||
| After spending a week in Moscow you get an email from your friend in Japan. He can get you a really good deal on a plane ticket and wants you to meet him in Tokyo next week to continue your post-graduation celebratory trip. You have 450,000 rubles left in your money pouch. In preparation for the trip you want to exchange your Russian rubles for Japanese yen so you get the following quotes: | |||||||||||||||||||||||||||
| Spot rate on the rubles/dollar cross rate | Rbl 30.96/$ | Spot rate on the rubles/dollar cross rate | Rbl 30.96/$ | ||||||||||||||||||||||||
| Spot rate on the yen/dollar cross rate | ¥84.02/$ | Spot rate on the yen/dollar cross rate | ¥84.02/$ | ||||||||||||||||||||||||
| a. What is the Russian ruble/yen cross rate? | a. What is the Russian ruble/yen cross rate? | ||||||||||||||||||||||||||
| b. How many yen will you obtain for your rubles? | b. How many yen will you obtain for your rubles? | ||||||||||||||||||||||||||
| Assumptions | Values | Assumptions | Values | ||||||||||||||||||||||||
| Beginning your trip with rubles | 450,000.00 | Beginning your trip with rubles | 450,000.00 | ||||||||||||||||||||||||
| Spot rate (Rubles/$) | 30.96 | Spot rate (Rubles/$) | 30.96 | ||||||||||||||||||||||||
| Spot rate (¥/$) | 84.02 | Spot rate (¥/$) | 84.02 | ||||||||||||||||||||||||
| a) What is the Russian ruble/yen cross rate? | a) What is the Russian ruble/yen cross rate? | ||||||||||||||||||||||||||
| Cross rate (Rubles/¥) | Cross rate (Rubles/¥) | 0.3685 | |||||||||||||||||||||||||
| Rubles/¥ = Rubles/$ ÷ ¥/$ | Rubles/¥ = Rubles/$ ÷ ¥/$ | ||||||||||||||||||||||||||
| b) How many yen will you obtain for your rubles? | b) How many yen will you obtain for your rubles? | ||||||||||||||||||||||||||
| Converting your Rubles into yen | Converting your Rubles into yen | 1,221,177 | |||||||||||||||||||||||||
| Chapter 6 | |||||||||||||||||||||||||||
| Problem 6.3 Derek Tosh and Yen-Dollar Parity | |||||||||||||||||||||||||||
| Problem 6.6 in the 16th edition (Part b only) | |||||||||||||||||||||||||||
| Derek Tosh is attempting to determine whether US/Japanese financial conditions are at parity. The current spot rate is a flat ¥89.00/$, while the 360-day forward rate is ¥84.90/$. Forecast inflation is 1.100% for Japan, and 5.900% for the US. The 360-day euro-yen deposit rate is 4.700%, and the 360-day euro-dollar deposit rate is 9.500%. | Derek Tosh is attempting to determine whether US/Japanese financial conditions are at parity. The current spot rate is a flat ¥89.00/$, while the 360-day forward rate is ¥84.90/$. Forecast inflation is 1.100% for Japan, and 5.900% for the US. The 360-day euro-yen deposit rate is 4.700%, and the 360-day euro-dollar deposit rate is 9.500%. | ||||||||||||||||||||||||||
| b. Find the forecasted change in the Japanese yes/U.S. dollar (¥/$) exchange rate one year from now. | b. Find the forecasted change in the Japanese yes/U.S. dollar (¥/$) exchange rate one year from now. | ||||||||||||||||||||||||||
| Assumptions | Value | Assumptions | Value | ||||||||||||||||||||||||
| Forecast annual rate of inflation for Japan | 1.10% | Forecast annual rate of inflation for Japan | 1.10% | ||||||||||||||||||||||||
| Forecast annual rate of inflation for United States | 5.90% | Forecast annual rate of inflation for United States | 5.90% | ||||||||||||||||||||||||
| One-year interest rate for Japan | 4.70% | One-year interest rate for Japan | 4.70% | ||||||||||||||||||||||||
| One-year interest rate for United States | 9.50% | One-year interest rate for United States | 9.50% | ||||||||||||||||||||||||
| Spot exchange rate (¥/$) | 89 | Spot exchange rate (¥/$) | 89 | ||||||||||||||||||||||||
| One-year forward exchange rate (¥/$) | 84.9 | One-year forward exchange rate (¥/$) | 84.9 | ||||||||||||||||||||||||
| b. | b. | ||||||||||||||||||||||||||
| Spot exchange rate (¥/$) | 89 | Spot exchange rate (¥/$) | 89 | ||||||||||||||||||||||||
| One-year forward exchange rate (¥/$) | 84.9 | One-year forward exchange rate (¥/$) | 84.9 | ||||||||||||||||||||||||
| Forcasted change in exchange rates | Forcasted change in exchange rates | 4.80% | |||||||||||||||||||||||||
| (Current Spot Rate - Forward Exchange Rate) / (Forward Exchange Rate) | (Current Spot Rate - Forward Exchange Rate) / (Forward Exchange Rate) | ||||||||||||||||||||||||||
| Problem 6.22 Grupo Bimbo (Mexico) | |||||||||||||||||||||||||||
| Problem 6.1 in 16th Edition | |||||||||||||||||||||||||||
| Grupo Bimbo, headquartered in Mexico City, is one of the largest bakery companies in the world. On January 1st, when the spot exchange rate is Ps10.80/$, the company borrows $25.0 million from a New York bank for one year at 6.80% interest (Mexican banks had quoted 9.60% for an equivalent loan in pesos). During the year, U.S. inflation is 2% and Mexican inflation is 4%. At the end of the year the firm repays the dollar loan. | Grupo Bimbo, headquartered in Mexico City, is one of the largest bakery companies in the world. On January 1st, when the spot exchange rate is Ps10.80/$, the company borrows $25.0 million from a New York bank for one year at 6.80% interest (Mexican banks had quoted 9.60% for an equivalent loan in pesos). During the year, U.S. inflation is 2% and Mexican inflation is 4%. At the end of the year the firm repays the dollar loan. | ||||||||||||||||||||||||||
| a. If Bimbo expected the spot rate at the end of one year to be that equal to purchasing power parity, what would be the cost to Bimbo of its dollar loan in peso-denominated interest? | a. If Bimbo expected the spot rate at the end of one year to be that equal to purchasing power parity, what would be the cost to Bimbo of its dollar loan in peso-denominated interest? | ||||||||||||||||||||||||||
| b. What is the real interest cost (adjusted for inflation) to Bimbo, in peso-denominated terms, of borrowing the dollars for one year, again assuming purchasing power parity ? | b. What is the real interest cost (adjusted for inflation) to Bimbo, in peso-denominated terms, of borrowing the dollars for one year, again assuming purchasing power parity ? | ||||||||||||||||||||||||||
| c. If the actual spot rate at the end of the year turned out to be Ps9.60/$, what was the actual peso-denominated interest cost of the loan? | c. If the actual spot rate at the end of the year turned out to be Ps9.60/$, what was the actual peso-denominated interest cost of the loan? | ||||||||||||||||||||||||||
| Borrowing principal | $25,000,000 | Borrowing principal | $25,000,000 | ||||||||||||||||||||||||
| Current spot rate, pesos/dollar (Ps/$) | 10.8 | Current spot rate, pesos/dollar (Ps/$) | 10.8 | ||||||||||||||||||||||||
| Mexican inflation (actual) | 4.00% | Mexican inflation (actual) | 4.00% | ||||||||||||||||||||||||
| US dollar inflation (actual) | 2.00% | US dollar inflation (actual) | 2.00% | ||||||||||||||||||||||||
| PPP forecast of spot rate (Ps/$) | Spot (PPP) = S * (1 + πPs) / (1 + π$ ) | PPP forecast of spot rate (Ps/$) | 11.01 | Spot (PPP) = S * (1 + πPs) / (1 + π$ ) | |||||||||||||||||||||||
| Actual spot rate end of year (Ps/$) | 9.6 | Actual spot rate end of year (Ps/$) | 9.6 | ||||||||||||||||||||||||
| Actual spot rate end of year (Ps/$) | 9.6 | Actual spot rate end of year (Ps/$) | 9.6 | ||||||||||||||||||||||||
| U.S. dollar borrowing rate (one year) | U.S. dollar borrowing rate (one year) | ||||||||||||||||||||||||||
| 6.80% | 6.80% | ||||||||||||||||||||||||||
| $25,000,000 | → | → | 1.068 | → | → | $26,700,000 | $25,000,000 | → | → | 1.068 | → | → | $26,700,000 | ||||||||||||||
| ↓ | ↓ | ↓ | ↓ | ||||||||||||||||||||||||
| ↓ | ↓ | ↓ | ↓ | ||||||||||||||||||||||||
| ↓ | ↓ | ↓ | ↓ | ||||||||||||||||||||||||
| ↓ | ↓ | ↓ | ↓ | ||||||||||||||||||||||||
| ↓ | ↓ | ↓ | ↓ | ||||||||||||||||||||||||
| Spot (Ps/$) | ---------------> 360 days ----------------> | EOY Spot (Ps/$) | Spot (Ps/$) | ---------------> 360 days ----------------> | EOY Spot (Ps/$) | ||||||||||||||||||||||
| 10.8 | 11.01 | 10.8 | 11.01 | ||||||||||||||||||||||||
| ↓ | ↓ | ↓ | ↓ | ||||||||||||||||||||||||
| ↓ | ↓ | ↓ | ↓ | ||||||||||||||||||||||||
| ↓ | ↓ | ||||||||||||||||||||||||||
| 270,000,000 | 270,000,000 | 294,014,118 | |||||||||||||||||||||||||
| Mexican pesos | Pesos needed to repay | Mexican pesos | Pesos needed to repay | ||||||||||||||||||||||||
| U.S. dollar loan | U.S. dollar loan | ||||||||||||||||||||||||||
| 9.60% | 9.60% | ||||||||||||||||||||||||||
| Quoted Mexico peso borrowing rate (one year) | Quoted Mexico peso borrowing rate (one year) | ||||||||||||||||||||||||||
| Implied cost = (Repaid/Initial proceeds) - 1 | Implied cost = (Repaid/Initial proceeds) - 1 | 8.89% | |||||||||||||||||||||||||
| a. If the ending spot rate was Ps11.01/$ as PPP would predict, the actual peso-based interest cost would be 8.894%. | a. If the ending spot rate was Ps11.01/$ as PPP would predict, the actual peso-based interest cost would be 8.894%. | ||||||||||||||||||||||||||
| b. The real peso-denominated interest cost (corrected for inflation) would be: | b. The real peso-denominated interest cost (corrected for inflation) would be: | ||||||||||||||||||||||||||
| The calculation shown at right is the precise or exact answer. The approximate form, found simply by subtracting inflation from nominal interest, would be 4.894%. | Nominal interest | 8.89% | The calculation shown at right is the precise or exact answer. The approximate form, found simply by subtracting inflation from nominal interest, would be 4.894%. | Nominal interest | 8.89% | ||||||||||||||||||||||
| Actual inflation | 4.00% | Actual inflation | 4.00% | ||||||||||||||||||||||||
| Real peso-interest | Real peso-interest | 4.71% | |||||||||||||||||||||||||
| b. If the actual end of year spot rate was Ps9.60/$ (just plug it into the spreadsheet for the EOY Spot rate), the actual peso-denominated interest cost would be -5.067%. (Yes, a negative interest rate.) | b. If the actual end of year spot rate was Ps9.60/$ (just plug it into the spreadsheet for the EOY Spot rate), the actual peso-denominated interest cost would be -5.067%. (Yes, a negative interest rate.) | ||||||||||||||||||||||||||
| Do this to see if you get the same negative number. Explain your answer. | |||||||||||||||||||||||||||
| Chapter 7 | |||||||||||||||||||||||||||
| Problem 7.12 U.S. Dollar-Euro | |||||||||||||||||||||||||||
| 7.12. U.S. Dollar-Euro. The following table indicates that a 1-year call option on euros at a strike rate of $1.25 = 1.00 Euro will cost the buyer $0.0632 per Euro, or 4.99 percent. But that assumed a volatility of 12.000 percent when the spot rate is $1.2674 = 1.00 Euro. What would that same call option cost if the volatility was reduced to 10.50 percent when the spot rate fell to $1.2480 = 1 euro? Put in the right substitution beliow. | 7.12. U.S. Dollar-Euro. The following table indicates that a 1-year call option on euros at a strike rate of $1.25 = 1.00 Euro will cost the buyer $0.0632 per Euro, or 4.99 percent. But that assumed a volatility of 12.000 percent when the spot rate is $1.2674 = 1.00 Euro. What would that same call option cost if the volatility was reduced to 10.50 percent when the spot rate fell to $1.2480 = 1 euro? Put in the right substitution beliow. | ||||||||||||||||||||||||||
| Pricing Currency Options on the Euro | Pricing Currency Options on the Euro | ||||||||||||||||||||||||||
| A U.S.-based firm wishing to buy | A European firm wishing to buy | A U.S.-based firm wishing to buy | A European firm wishing to buy | ||||||||||||||||||||||||
| or sell euros (the foreign currency) | or sell euros (the foreign currency) | or sell dollars (the foreign currency) | or sell euros (the foreign currency) | or sell euros (the foreign currency) | or sell euros (the foreign currency) | or sell dollars (the foreign currency) | or sell euros (the foreign currency) | ||||||||||||||||||||
| Variable | Value | Variable | Value | Variable | Value | Variable | Value | ||||||||||||||||||||
| Spot rate (domestic/foreign) | S0 | $1.2480 | S0 | € 0.8013 | Spot rate (domestic/foreign) | S0 | $1.2480 | S0 | € 0.8013 | ||||||||||||||||||
| Forward Rate (Domestic/Foreign) | F0 | $1.2389 | F0 | € 0.8072 | Forward Rate (Domestic/Foreign) | F0 | $1.2389 | F0 | € 0.8072 | ||||||||||||||||||
| Strike rate (domestic/foreign) | X | $1.2500 | X | € 0.8000 | Strike rate (domestic/foreign) | X | $1.2500 | X | € 0.8000 | ||||||||||||||||||
| Domestic interest rate (% p.a.) | rd | 1.453% | rd | 2.187% | Domestic interest rate (% p.a.) | rd | 1.453% | rd | 2.187% | ||||||||||||||||||
| Foreign interest rate (% p.a.) | rf | 2.187% | rf | 1.453% | Foreign interest rate (% p.a.) | rf | 2.187% | rf | 1.453% | ||||||||||||||||||
| Time (years, 365 days) | T | 1.000 | T | 1.000 | Time (years, 365 days) | T | 1.000 | T | 1.000 | ||||||||||||||||||
| Days equivalent | 365.00 | 365.00 | Days equivalent | 365.00 | 365.00 | ||||||||||||||||||||||
| Volatility (% p.a.) | s | 12.000% | s | 12.000% | Volatility (% p.a.) | s | 12.000% | s | 12.000% | ||||||||||||||||||
| d1 | -0.01 | 0.01 | d1 | 0.13 | -0.13 | d1 | -0.01 | 0.01 | d1 | 0.13 | -0.13 | ||||||||||||||||
| d2 | -0.13 | 0.13 | d2 | 0.01 | -0.01 | d2 | -0.13 | 0.13 | d2 | 0.01 | -0.01 | ||||||||||||||||
| N(d1) | 0.49 | 0.51 | N(d1) | 0.55 | 0.45 | N(d1) | 0.49 | 0.51 | N(d1) | 0.55 | 0.45 | ||||||||||||||||
| N(d2) | 0.45 | 0.55 | N(d2) | 0.51 | 0.49 | N(d2) | 0.45 | 0.55 | N(d2) | 0.51 | 0.49 | ||||||||||||||||
| Call option premium (per unit fc) | c | $0.0534 | c | € 0.0412 | Call option premium (per unit fc) | c | $0.0534 | c | € 0.0412 | ||||||||||||||||||
| Put option premium (per unit fc) | p | $0.0643 | p | € 0.0342 | Put option premium (per unit fc) | p | $0.0643 | p | € 0.0342 | ||||||||||||||||||
| (European pricing) | (European pricing) | ||||||||||||||||||||||||||
| Call option premium (%) | c | 4.28% | c | 5.15% | Call option premium (%) | c | 4.28% | c | 5.15% | ||||||||||||||||||
| Put option premium (%) | p | 5.15% | p | 4.27% | Put option premium (%) | p | 5.15% | p | 4.27% | ||||||||||||||||||
| When the volatility is reduced from 12.000% to 10.500%, the premium on the call option on euros rises to $0.0412 = €1.00, or 5.15%. | |||||||||||||||||||||||||||
| Pricing Currency Options on the Euro | |||||||||||||||||||||||||||
| A U.S.-based firm wishing to buy | A European firm wishing to buy | ||||||||||||||||||||||||||
| or sell euros (the foreign currency) | or sell euros (the foreign currency) | or sell dollars (the foreign currency) | or sell euros (the foreign currency) | ||||||||||||||||||||||||
| Variable | Value | Variable | Value | ||||||||||||||||||||||||
| Spot rate (domestic/foreign) | S0 | $1.2480 | S0 | € 0.8013 | |||||||||||||||||||||||
| Forward Rate (Domestic/Foreign) | F0 | $1.2389 | F0 | € 0.8072 | |||||||||||||||||||||||
| Strike rate (domestic/foreign) | X | $1.2500 | X | € 0.8000 | |||||||||||||||||||||||
| Domestic interest rate (% p.a.) | rd | 1.453% | rd | 2.187% | |||||||||||||||||||||||
| Foreign interest rate (% p.a.) | rf | 2.187% | rf | 1.453% | |||||||||||||||||||||||
| Time (years, 365 days) | T | 1.000 | T | 1.000 | |||||||||||||||||||||||
| Days equivalent | 365.00 | 365.00 | |||||||||||||||||||||||||
| Volatility (% p.a.) | s | Put in 10.5 for s | s | Put in 10.5 for s | |||||||||||||||||||||||
| d1 | ERROR:#DIV/0! | ERROR:#DIV/0! | d1 | ERROR:#DIV/0! | ERROR:#DIV/0! | ||||||||||||||||||||||
| d2 | ERROR:#DIV/0! | ERROR:#DIV/0! | d2 | ERROR:#DIV/0! | ERROR:#DIV/0! | ||||||||||||||||||||||
| N(d1) | ERROR:#DIV/0! | ERROR:#DIV/0! | N(d1) | ERROR:#DIV/0! | ERROR:#DIV/0! | ||||||||||||||||||||||
| N(d2) | ERROR:#DIV/0! | ERROR:#DIV/0! | N(d2) | ERROR:#DIV/0! | ERROR:#DIV/0! | ||||||||||||||||||||||
| Call option premium (per unit fc) | c | ERROR:#DIV/0! | c | ERROR:#DIV/0! | |||||||||||||||||||||||
| Put option premium (per unit fc) | p | ERROR:#DIV/0! | p | ERROR:#DIV/0! | |||||||||||||||||||||||
| (European pricing) | |||||||||||||||||||||||||||
| Call option premium (%) | c | ERROR:#DIV/0! | c | ERROR:#DIV/0! | |||||||||||||||||||||||
| Put option premium (%) | p | ERROR:#DIV/0! | p | ERROR:#DIV/0! | |||||||||||||||||||||||
5.13: Direct and Indirect Quotes: Define and give an example of the following: a. Direct Quote between the U.S. dollar and the Mexican peso, wher the United States is denignated as the home country. b. Indirect quote between the Japanese yen and the Chinese renminbi (yuan), where China is designated as the home country.
Question 6.3: Big Mac Index. How close does the Big Mac Index conform to the theoretical requirements for a law of one price measurement of purchasing power parity? 6.17. Forward Rate as an Unbiased Predictior. Some forecasters believe that foreign exchange markets for the major floating currencies are 'efficient' and forward exchange rates are unbiased predictors of future spot exchange rates. What is meant by 'unbiased predictor' in terms of the reliability of the forward rate in estimating future spot exchange rates?
7.6. Options versus Futures. Explain the difference between foreign currency options and futures and when either might be most appropriately used. 7.10. Writing Options. Why would anyone write an option, knowing that the gain from receiving the option premium is fixed but the loss, if the underlying prices goes in the wrong directiont, can be extremely large? 7.15. Option Values and MOney. Options are oftern described as in-the-money, at-the-money, or out-of-the-money. What does that mean and how is it determined?
Use the above calculations, when the volatility was reduced, what happened to the call premium? (up or down by how much) What happened to the put premium? (up or down by how much)
