A currency speculator expects the price of BP to change from $1.40/BP to $1.70?B
ID: 2727270 • Letter: A
Question
A currency speculator expects the price of BP to change from $1.40/BP to $1.70?BP in 90 days. You have a line of credit for $14 million or BP million now. Interest rate in USA is 3% it is 4% in England Determine the amount of profit the speculator will make in dollars a)$17,170,000 b)$2,870,000 c)$3,065,000 d)$4,675,000 41) You have access to $200,000, One year interest rate in USA: 4%: one year rate in mexico: 9% spotrate for Peso:$1.50?peso: One year forward rate: $1,41/Peso. Use this data to answer the following three questions: What is the covered rate of return from USA point of view? a)3.88% b)1.73% c)2.46% d)5% 42)What is the covered rate of return from the Mexican point of view? a) 10.63% b)8.28% c)5.91% d)3.22% 43)How much is your covered arbitrage profit (in US dollars)? a)$4487 b)$2156 c)$3276 d) $1788Explanation / Answer
40) Credit of 14million taken for 3% interest for 90 days
here interest = 14,000,000 * 3% * 90/360 = 105,000
Total cost = 14million + 105,000 = $14,105,000
BP 10 million for 4% interest for 90 days, that means interest = 10,000,000*4% *90/360 = 100,000
Total revenue after 90days in BP = 10,000,000 + 100,000 = BP10,100,000
This revenue converted in to US $ @1.7 = 10,100,000*1.7 = $17,170,000
Speculator profit = $17,170,000 - $14,105,000 = $3,065,000 correct option is (c).
41) Covered interest rate from USA point of view,
spot exchange rate expected in one year = spot rate * 1 + us interest rate / 1 + mexico interest rate
=1.50 x 1+ 4% /1 + 6% = 1.50 * 0.954 = $1.43
If rus is the unknown U.S. interest rate, and given that the mexico interest rate stayed at 9%,
then accordingly, 1.41/1.50 = (1+rus)/1.09 or rus = 2.46% correct option is (c).
42. Covered interest rate from Mexico point of view,
spot exchange rate expected in one year = spot rate * 1 + mexico interest rate / us interest rate /
=1.50 x 1+ 9% /1 + 4% = 1.50 * 1.048 = $1.572
If r is the unknown mexico interest rate, and given that the US interest rate stayed at 4%,
then accordingly, 1.57/1.50 = (1+r)/1.04
1.047 = (1+r)/1.04
1.047 * 1.04 = 1+r
r = 8.28% correct option is (b).
43) There is an arbitrage profit to be made here.
It goes like this: 1) Sell the dollars for Mexico i.e, 200,000 / 1.5 = 133,333;
2) Invest the peso proceeds in an mexicon account for 1year and earning 9%;
3) Sell all the peso(145,333) back at $1.41/peso for $204,920;
4) Calculate the cost of funds used at the US dollor rate of 4.00% per annum, with principal and interest then totaling $2,08,000. Thus the profit is $204,920 - $2,08,000 = $3,080