A trader, who is considering uncovered interest arbitrage between the US dollar (USD) and Australian dollar (AUD), faces the following data:
Funds available: 2 million USD
Spot exchange rate: 0.94 AUD per USD
Spot exchange rate one year ago: 1.00 AUD per USD
USD 3-month interest rate: 0.12% per annum
AUD 3-month interest rate: 4.69% per annum
(1) Calculate the profit that would be made if the exchange rate remains at its current level in three months’ time;
(2) How would the profit figure change if the Australian dollar continues to strengthen at the same rate as it has done over the previous year?
Max 200 words; 15 mark
You are the financial manager of Ashdown plc: a US company which has just signed a contract for the sale of a computer system in the UK for £3,000,000 in a year’s time. You have collected the following data relevant to this project
Spot exchange rate: $1.2 = £1
One year forward exchange rate $1.4 = £1
UK one year interest rate 8%
US one year interest rate 10%
Price of a put option for £3,000,000 at an exercise price of $1.3 per pound: £400,000
(1) How should Ashdown manage the risk arising out of this contract? Discuss and evaluate at least three choices. What is your recommended strategy? Give reasons for your answer. Your answer needs to include all calculations.
(2) In what ways does the exposure faced by Ashdown here differ from other kinds of exposure and what is the impact of this difference on the risk management strategy you have recommended?
How would the profit figure change if the Australian dollar continues to strengthen at the same rate as it has done over the previous year?
Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.
You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.Read more
Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.Read more
Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.Read more
Your email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.Read more
By sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.Read more