Multinational Finance, EIE 2005/06, problem set - II
Question 1
Given the quotations and the interest rates compute 6-mth and 12-mth forward exchange rates for Polish zloty per U.S.
dollar.
Spot exchange rate PLN 4.0841  4.1667/USD
1-year zloty interest rates 10.75%  16.9% per annum
1-year U.S. dollar interest rates 3.85% - 4.41% per annum
Question 2
Money and foreign exchanges markets in Japan and Germany are very efficient. You have the following information:
Japan Germany
Spot exchange rate JPN 100.00/EUR EUR 0.0100/JPN
Expected inflation rate 2.00% p.a. 5.00% p.a.
One-year T-bill rate ? 8.00% p.a.
a. Estimate one-year T-bill rate in Japan.
b. Estimate one-year forward exchange rate for euro (per yen).
Question 3
José can borrow 625,000,000 pesos (UXN) for 6 months. Today s spot exchange rate is UXN 125.00/USD. The US
one-year interest rate is 8% and the Mexico one-year interest rate is 6%. 6-month forward exchange rate is
UXN 124/USD. Is there an arbitrage opportunity and if so, how would Jose take advantage of it?
Question 4
Yoko is the currency arbitrager. This morning spot exchange rate is JPN 111.22/USD and the 90-day forward exchange
rate is JPN 111.14/USD. The current 90-day yen interest rate is 2.1560%. Yoko has JPN 250,000,000 at her disposal.
Recent signals suggest that 90-day interest rates in the United States will be raised 25 basic points from their current
level of 3.1250%.
a. Can Yoko make a profit through covered interest arbitrage? Compute her profit.
b. Suppose that Yoko wishes to speculate through uncovered interest arbitrage. What could she expect to make in
profit with this strategy?
Question 5
The spot exchange rate for Singapore dollar is SGD 1.9200/USD and the 3-month forward rate is SGD 1.9000/USD.
You believe that after 3 months spot exchange rate will be SGD 1.8800/USD and you have USD 100,000 at your
disposal. Interest rates are as follows: 4%p.a. for Singapore dollar and 8%p.a. for U.S. dollar. Consider two speculation
scenarios  through spot and forward market. Which one gives you more profit?
Question 6
Suppose that interest rate on deposits in Poland is 13%p.a. and the one-year interest rate on euro deposits is 8%p.a. The
one-year forward premium on euro is 20%p.a.
a. Is there an opportunity for interest arbitrage? If so, compute the profit.
b. At what forward premium the profit will be zero?
c. Calculate the interest rate on zloty, if all markets were efficient.
Question 7 (homework 1)
Harry is the currency arbitrager and he is authorized to use USD 10,000,000 or its Canadian dollar equivalent. The spot
exchange rate is CAD 1.1520/USD and 6-month forward rate is CAD 1.1635/USD. 6-month interest rates are as
follows: 10%p.a. on Canadian dollars and 7.5%p.a. on the U.S. dollars. Transaction costs are USD 1700 paid at the end
of six months. The ending profit should be realized in Canadian dollars.
a. Are there opportunities for CIA? If so, explain the transaction s direction.
b. Compute Harry s profit from this transaction.