Chapter 5, Questions 4, 17, 25, 41 and 42 International Finance (Jeff Madura) 4.

Question

Chapter 5, Questions 4, 17, 25, 41 and 42 International Finance (Jeff Madura)

4.Compute the forward discount or premium for the Mexican peso whose 90 day forward rate is.102 and spot rate is .10. State whether your answer is disount or premium rate.

17. Assume that on November 1st, the spot rate of the British Pound was $1.58 and the price on the Decemeber futures contract was $1.59. Assume the pound depreciated during Novmber so that by Novmber it was worth $1.51

What do you think happened to the futures price over the month of November? Why? If you had known this would occur would you have purchased or sold a Decemeber futures contract in pounds on November 1st? Why?

Explanation / Answer

Solution:-

4) Since the currency sign is not given we are calculating without it.

90 days Percentage premium of discount =( FR-SR)/SR

                                                                  =(0.102-0.10)/0.10

                                                                  =2%

Hence the yearly premium =2%*360/90= 8%

Forward premium for the Mexican peso = 8%

The calculated rate is the premium rate.

17) Given,

    Spot rate= 1 Pound = $1.58

Future rate = 1 Pound = $1.59

Rate at the end of November = 1 pound= $1.51

-Since the pound is depreciating( since the rate of pound drop from $1.58 to $1.51), hence the price of the future contract rate will also decrease over the month of November.

-Since the pound is depreciating , if we had known we would have sold pound future contract and earn profit on that.

Please feel free to ask if you have any query in the comment section

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.