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Bank A has purchased a 2.5 million one-year Euro loan that pays 10% interest annually. The spot rate of U.S. dollars for Euros is 1.20. It has funded this loan by accepting a yen-denominated deposit for the equivalent amount and maturity at an annual rate of 4%. The current spot rate of U.S. dollars for Japanese yen is .0085.

a. What is the loan amount in dollars?

b. What is the deposit amount in yen?

c. What is the interest income earned in dollars on this one-year transaction if the spot rate of U.S. dollars for Euro and U.S. dollars for yen at the end of the year are 1.25 and .0080, respectively?

d. What is the interest expense in dollars?

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Bunny Greenfelder
Bunny GreenfelderLv2
28 Sep 2019

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Related questions

Suppose that the following prices are given as true transaction prices:

Spot Yen $0.0153

3-month Forward Yen $0.0155

3-month Yen interest rate 2.0654%

3-month Dollar interest rate 6.0120%

Suppose that you are the manager of a firm that has a payment of 2 million yen due in 90 days and you want to lock in a price today.

Consider the two paths below:

Path 1: investing dollars for 90 days and then selling dollars for yens at the forward rate

Path 2: selling the dollars for yens at the spot rate and investing yens for 90 days Which is the best way for you to transact or are the paths equivalent?

Multiple choice

26. The spot €:$ is equal to 1.1795. The one-year interest rates on the Eurocurrency market are 4% in euros and 5% in U.S. dollars. What is the one-year forward exchange rate?

A. 1.1683

B. 1.1908

C. 1.1895

D. 1.1913

27. The spot €:$ is equal to 1.1795. The one-year interest rates on the Eurocurrency market are 4% in euros and 5% in U.S. dollars. What is the three-month forward exchange rate?

A. 1.1908

B. 1.1683

C. 1.1824

D. 1.1766

28. If the exchange rate value of the euro goes from U.S. $1.15 to U.S. $1.05, then:

A. The euro has appreciated, and Europeans will find U.S. goods cheaper.

B. The euro has appreciated, and Europeans will find U.S. goods more expensive.

C. The euro has depreciated, and Europeans will find U.S. goods more expensive.

D. The euro has depreciated, and Europeans will find U.S. goods cheaper

1. James Smith is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ and the 6-month forward rate is ¥128.53/$. James thinks the yen will move to ¥128.00/$ in the next six months.

(1) If James buys $100,000 worth of yen at today's spot price his potential gain is ___________ and his potential loss is ___________.

A) $100,000; unlimited

B) unlimited; unlimited

C) $100,000; $100,000

D) unlimited; $100,000

(2) If James's expectations are correct, then he could profit in the forward market by _____________ and then _____________.

A) buying yen for ¥128.00/$; selling yen at ¥128.53/$

B) buying yen for ¥128.53/$; selling yen at ¥128.00/$

2. David Dao of United Airlines, Inc. believes the Swiss franc will appreciate versus the U.S. dollar in the coming 3-month period. He has $100,000 to invest. The current spot rate is $0.5825/SF, the 3-month forward rate is $0.5642/SF, and he expects the spot rates to reach $0.6251/SF in three months.

(1) Calculate David's expected profit assuming a pure spot market speculation strategy.

(2) Calculate David's expected profit assuming he buys (or sells) SF three months forward.

3. Jacob Singleton trades currency for Karma Capital of Geneva. Jacob has $10 million to begin with, and he must state all profits at the end of any speculation in U.S. dollars. The spot rate on the euro is $1.3358/€, while the 30-day forward rate is $1.3349/€.

(1) If Jacob believes the euro will continue to rise in value against the US dollar, so that he expects the spot rate to be $1.3600/€ at the end of 30 days, what should he do?

(2) If Jacob believes the euro will depreciate in value against the US dollar, so that he expects the spot rate to be $1.2800/€ at the end of 30 days, what should he do?

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