FIN 3410 Lecture Notes - Lecture 15: Foreign Exchange Spot

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Day 15 & 16 Notes
Problem
A. Explain the MMH Process for payable:
B. MMH Cost
Find PV(payable)
i. = Y 200,000,000 / (1 + 0.015)
ii. = Y 197,044,335 needed Y investment
Borrow $ to buy PV(payable)
iii. $ loan = Y 197,044,335 / (Y 110/$)
iv. = $1,791,312.14
Exchange borrowed $ for PV(payable)
v. = $1,791,312.14 * (Y 110/$)
vi. = Y 197,044,335
Invest Y 197,044,335 in Japan for 3m @ iY3m = 1.5%
At maturity, pay payable with the Y investment
vii. FV (Y 197,044,335) = Y 197,044,335 * (1 + 0.015)
viii. = Y 200,000,000 = payable
Repay $(loan + inv)
ix. $(loan + inv) = $1,791,312.14 * (1 + 0.01)
x. = $$1,809,225.26 MMH Cost
Sample Exam 4
Background
payable = Y 400 m
t = 1 year
So = Y 120/$
F1 = Y 105/$
iY = 6%
i$ = 8%
1 year call
E = $0.0080/Y
C = 0.012 cents/Y $0.012/Y 100
o [0.012 cents / Y] * 100/100 = $0.012/Y 100
Problem
A. FH Cost = ? MMH Cost = ?
a. FH Cost = Y 400,000,000 / (Y 105/$) = $3,809,523.81
b. MMH Cost = $(loan + inv)
i. = [Y 400,000,000 / (1 + 0.06)] * [1 / (Y 120/$)] * (1 + 0.08)
ii. = $3,396,226
B. F1 = E[S1] the best predictor of future spot exchange rate
a. F1 = E[S1] = Y 105/$
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