Table 9-1 Q1. On August 19, 2010, you convert 500,000 U.S. dollars to Japanese y
ID: 2730147 • Letter: T
Question
Table 9-1
Q1. On August 19, 2010, you convert 500,000 U.S. dollars to Japanese yen in the spot foreign exchange market and purchase a one-month forward contract to covert yen into dollars. How much will you receive in U.S. dollars at the end of the month? Use the data in Table 9-1 for this problem.
Q2. Bank USA recently purchase $10million worth of euro denominated one-year CDs that pay 10% interest annually. The current spot rate of U.S. dollars for euros is $1.30/€1.
a- Is Bank USA exposed to an appreciation or depreciation of the dollar relative to the euro?
b- What will be the return on the one-year CD if the dollars appreciates relative to the euro such that the spot rate of U.S. dollars for eurosat the end of the year is $1.2/€1?
c-What will be the return on the one-year CD if the dollars depreciates relative to the euro such that the spot rate of U.S. dollars for euroat the end of the year is $1.4/€1?
Explanation / Answer
1. Exchagne rate in the beginning of August $1 = 85.32 yen. So, conversion of $500,000 to Yen at a rate of 85.32 yen per dollar, then we can receive 42,660,000 yen.
At the end of August, exchange rate is $0.011723/1 yen; total we can receive = 42,660,000 yen x $0.011723 = $500,103.18
2.
(a) Bank USA is exposed to an appreciation of the dollar relative to the euro
(b) Bank USA converts $10,000,000 into euro at an exchage rate of $1.30/1 euro then it will get 10,000,000/1.3 = 7,692,307.69 euros.
At the end of the month Bank USA gets back Principal and interest on 7,692,300 euros CD and converts them to dolars as 7,692,307.69 euros x(1.10) x 1.20 = $10,153,846
Return is = ($10,153,846 - $10,000,000)/10,000,000 = 153,846/10,000,000 = 0.0153846 = 1.54%
(c) Bank USA convrts the $10,000,000 to euro and gets 10,000,000/1.3 = 7,692,307.69 euros
At the end of the month Bank USA gets principal and interest on 7,692,300 CDs and converts them into dollars as folows: 7,692,307.69 x 1.1 x 1.4 = $ 11,846,154.Hence, the return is (11,846,154 - 10,000,000)/10,000,000 = 1,846,154/10,000,000 = 0.184615 or 18.46
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