Global Finance

Global Finance.

I’m studying for my Business class and need an explanation.


I need the following completed showing all work (step by step) and fully answered worded questions.

1. The spot MXN/JPY FX rate is S0(MXN/JPY) = MXN0.100/JPY. The JPY interest rate is 3.0% per annum and the MXN interest rate is 4.5% per annum, both quoted with semi-annual compounding. Suppose that you observe a 6-month forward price of F = MXN0.101/JPY. How would you make an arbitrage profit? Describe the steps and calculate the profit.

2. Volusia, Inc. is a U.S.-based exporting firm that expects to a receive payment of C$400,000 in five days. Today’s spot rate is C$1.25/US$. Based on data for the last five years, Volusia estimates the standard deviation of daily percentage changes to be 0.3% for the Canadian dollar. What is the 5-day 99% VaR? Assume that returns are normally distributed with mean zero.

3. VT, Inc. is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is NOK40 million. If the project is undertaken, VT would terminate the project after four years. VT’s cost of capital is 13%, and the project is of the same risk as Baps’ existing projects. All net cash flows generated from the project will be remitted to the parent at the end of each year. Listed separately below are the estimated cash inflows and outflows the Norwegian subsidiary will generate over the project’s lifetime in millions of Norwegian kroner (NOK), and VT’s forecast of future exchange rates. The current exchange rate of the Norwegian kroner is $0.135/NOK.

What are the NPV (in $) and IRR of the Norwegian project?

Use the following information for problem 4.

VT Power Generation, Inc., a Virginia-based electric utility, has agreed to buy two gas turbines from Rolls Royce at a price of £10 million per turbine. Payment is due upon delivery, one (1) year from today. You are VT’s Treasurer. You have obtained the following quotes.

Spot FX (Foreign eXchange) rate: $1.5000/£

One year forward FX rate: $1.5218/£

One year $ interest rate: 4.50%

One year £ interest rate: 3.00%

One year call option (on £) w/strike $1.500/£: $0.0691/£

You are considering three possible strategies.

i) Hedge using the forward market.

ii) Hedge using the money market.

iii) Hedge using the options market.

4. For each hedging strategy, calculate the expected cash flows, both today and in 1 year. Based on your calculations, choose the strategy you think is best. What reason will you give the CEO for choosing this particular strategy? (You must include a sound economic reason in order to get full credit!).

5. You observe the following spot exchange rates.

Stockholm Bank S(¥/SEK) = ¥19.00/SEK

Tokyo Bank S(¥/$) = ¥167.0/$

New York Bank S(£/$) = £0.900/$

What is the equilibrium spot SEK-£ exchange rate, i.e, what is S(SEK/£)?

6. Continuing with the data from the previous question, suppose you observe S(SEK/£) = SEK9.50/£. You have ¥1,000. Can you earn an arbitrage profit? If yes, show the steps involved in taking advantage of the arbitrage opportunity and calculate your profit in yen. Assume that there are no transactions costs.

7. Suppose the current spot FX rate is S0(£/$) = £0.60/$. The consensus long-term forecast for US inflation is 5% per year, while the long-term forecast for UK inflation is 3%. By what percentage do you expect the spot rate to change over the coming year?

8. Continuing with the data from the previous question, estimate the spot FX rates which will obtain for the next five years. That is, estimate S1(£/$), S2(£/$), S3(£/$), S4(£/$), and S5(£/$). How much confidence do you have in your forecast?

Global Finance

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