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Answers to Problems of Chapter 14

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2.
Solution: The bond cost $987.65 / $1.75  £564.37.
At maturity, the $1,000 is worth $1,000 / $1.83  £546.45.
The holding period return is (546.45  564.37)/564.37  0.0317.

3.
Solution: The price of each share is $93.00 / $0.68  136.76 Canadian dollars.
The dividend is $0.72 / $0.71  1.014 Canadian dollars
The sale price is $100.25 / $0.71  141.20 Canadian dollars
The return  (141.20  1.014  136.76) / 136.76  0.03988

4.
Solution: % change in currency  (0.85 – 0.93) / 0.93  0.086
Total investment return  0.02  (0.086)  0.1060 , which is equal to 10.60%

5.

Solution: use the formula : (SR / FR) = ( 1 + id ) / (1 + if )


where FR is the forward exchange rate and SR is the spot exchange rate, and id is the domestic interest
rate and if is the foreign country’s interest rate.
(SR / FR) = ( 1 + id ) / (1 + if )
(SR / FR) = ( 1 + id ) / (1 + if ) = > SR = FR * ( 1 + id ) / (1 + if )

Spot rate  1.75  (1.045 / 1.030)  $1.775 / £

6.
Solution: Spot rate  1.28  (1 / 0.62)  2.0645 Canadian dollars / pound

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7.
Solution: Complete the following transactions simultaneously:
a. Exchange $1.00 into 1.36 New Zealand dollars.
b. Exchange the 1.36 New Zealand dollars into 0.6664 British pounds.
(Note 1.36 * 0.49 = 0.6664)
c. Exchange the 0.6664 British pounds into $1.0748. (Note : 0.6664 / 0.62 = 1.0748 )
d. This yields a riskless $0.0748.

8.
Solution: % Change  (1.16 – 0.90) / 0.90  28.88%
The Euro has appreciated by 28.88%

9.
Solution: Rate  1 / 0.375  $2.67 / real

10.
Solution: Expected rate  10  (1.23 / 1.02)  12.059 pesos per dollar.

11.
Solution: use the formula : (id - if) = (SR / FR ) - 1
where FR is the forward exchange rate and SR is the spot exchange rate, and id is the domestic interest
rate and if is the foreign country’s interest rate.

iuk – iusa  (1.825 / 1.790) 1 = 0.0195

So, if current U.S. rates are 5%, the rates in England are 0.05  0.01955  0.06955  6.95%

12.
Solution: (X  120) / 120  0.10, so X  108 yen per dollar.

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13. Solution:
The current exchange rate would change by £0.55 / $  25%  £0.1375 / $,
Hence, the new exchange rate will be £0.6875 / $ ( Note : 0.55 + 0.1375 = 0.6875)

15.
Solution: use the formula : (SR / FR) = ( 1 + id ) / (1 + if )
where FR is the forward exchange rate and SR is the spot exchange rate, and id is the domestic interest
rate and if is the foreign country’s interest rate.
(SR / FR) = ( 1 + id ) / (1 + if )
(SR / FR) = ( 1 + id ) / (1 + if ) = > FR = SR * ( 1 + if ) / (1 + id )
FR = [120 * (1 + 0.02) ] / (1 + 0.04)
FR = [120 * (1.02)] / 1.04
FR = 117.69 Yen / $

16.
Solution:
a. Borrow $1.00 at 4%. You will owe $1.04 at the end of the period.
b. Exchange the $1.00 into ¥120, and lend it at 2%. You will have ¥122.40. (Note : 120 * 1.02 = 122.40)
c. Enter into the forward agreement.
d. At the end of the period, convert the ¥122.40 into dollars at ¥115 / $1.00
You will acquire 1.0643 $ (Note : 122.40 / 115 = 1.0643)

e. Pay the $1.04 you owe. This leaves $0.0243. (Note : 1.0643 – 1.0400 = 1.0243)

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17.
Solution: use the formula : (SR / FR) = ( 1 + id ) / (1 + if )
where FR is the forward exchange rate and SR is the spot exchange rate, and id is the domestic interest
rate and if is the foreign country’s interest rate.
(SR / FR) = ( 1 + id ) / (1 + if )

(1.0 / 1.1 ) = ( 1 + 0.04 ) / ( 1 + if )

Solve for if ;

if = 0.1440 ;
if = 14.40 %