NATIONALUNIVERSITYOFSCIENCESANDTECHNOLOGY NUSTBusinessSchool CourseInternationalFinancialManagement(Fin708)

AssignmentNo.2 Answerallthefollowingquestionswithdetailmethodologyandexplanation,ifrequired.

Following the AssumethatthetreasurerofGoogleCompanyhasanextracashreserveof$100,000,000toinvestfor arbitragesixmonths.Thesixmonthinterestrateis8percentperannumintheUnitedStatesand7percentper transactions in Germany. Currently, the spot exchange rate is 1.01 per dollar and the sixmonth forward annum described exchangerateis0.99perdollar.ThetreasurerofGoogleCompanydoesnotwishtobearanyexchange risk.Whereshouldhe/sheinvesttomaximizethereturn? above, The PROBLEMS1. dollar interest Suppose that the rate will rise; treasurer of IBM QuestionNo.02 The pound has an extra cash interest rate will Supposethatthecurrentspotexchangerateis0.80/$andthethreemonthforwardexchangerateis reserve of fall; The spot 0.7813/$. The threemonth interest rate is 5.6 percent per annum in theto $100,000,000 United States and 5.40 percentperannuminFrance.Assumethatyoucanborrowupto$1,000,000or800,000. exchange rate invest for six will rise; The months.The sixa) Showhowtorealizeacertainprofitviacoveredinterestarbitrage,assumingthatyouwantto forward realizeprofitintermsofU.S.dollars.Alsodeterminethesizeofyourarbitrageprofit. month interest rate exchange rate AssumethatyouwanttorealizeprofitintermsofEuros.Showthecoveredarbitrageprocess b) is 8 percent per will fall.These anddeterminethearbitrageprofitinEuros. annum in the adjustments will United States and Note:Assumethatborrowingandlendingrateissameiethreemonthinterestrateis5.6percentper continue annumintheUnitedStatesand5.40percentperannuminFrance until 7 percent per IRP holds.4. annum inGermany. SupposeQuestionNo.03 that Currently, the spot the current spot OnJanuary10,HondaCompanyinGermanyagreestoimportautopartsworth$7millionfromthe exchange rate is exchange rate is UnitedStates.ThepartswillbedeliveredonMarch4andarepayableimmediatelyindollars.Honda 1.01 per dollar decidestohedgeitsdollarpositionbyenteringintofuturescontracts.Thespotrateis$0.8947/andthe 0.80/$ and the and the six-month Marchfuturespriceis$0.9002/. three-month forward exchange forward rateis 0.99 per exchange rate is dollar. The 0.7813/$. The 1 treasurer of IBM three-month does not wish to interest rate is bear any exchange 5.6 percent per

QuestionNo.01

a) CalculatethenumberoffuturescontractsthatHondamustbuytooffsetitsdollarexchangeriskon thepartscontract. b) OnMarch4,thespotrateturnsouttobe$0.8952/,whiletheMarchfuturespriceis$0.8968/. CalculateHonda'sneteurogainorlossonitsfuturesposition. c) Compare(b)figurewithHonda'sgainorlossonitsunhedgedposition. Note1:Assumethatonefuturecontractcontains125,420units. Note2:AssumethatHondahasnomoneytobuyMarchdollarsatJanuary10. QuestionNo.04 CitigroupsellsacalloptiononEuros(contractsizeis500,000)atapremiumof$0.04pereuro.Ifthe exercisepriceis$0.91andthespotpriceoftheeuroatdateofexpirationis$0.93,whatisCitigroup's profit(loss)onthecalloption?

Due Date:
Youarewelcomesubmiteithersoftcopyorhandwrittencopyonorbefore23rdNovember,2012.The deadlineisfinal

Grading
Assignmentswillbegradedpersubmissionoutofamaximumscoreof20,andeachgroupmemberwill beassignedthesamegrade.