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1

Finance

1.You pay $23,100 to the Laramie Fund, which has a NAV of $21 per share at the beginning of the year. The fund deducted a front-end load of 5%. The securities in the fund increased in value by 10% during the year. The fund's expense ratio is 1.6% and is deducted from year-end asset values. What is your rate of return on the fund if you sell your shares at the end of the year? O 15.76% O 2.83% O 11.76% O 13.55%

2.

Suppose that the current exchange rate is SF1.25/$ and three month forward exchange rate is SF1.30/$. The three-month interest rate is 4 percent per annum in United States and 8 percent per annum in Switzerland. Assume that you can borrow up to $1,000,000 or SF 1,250,000.

a) Is Interest Rate Parity holding?

b) If your answer to part a is no, how would you realize a certain profit via a covered interest arbitrage? Also determine the size of the arbitrage profit.

3.

While you were visiting Munich, you purchased a Range Rover for €100,000, payable in six months. You have enough cash in US dollars at your bank in NY City, which pays 3% interest for six months, to pay for the car. Currently, the spot exchange rate is $1.35/€ and the six-month forward exchange rate is $1.30/€. In Munich, the money market interest rate is 4% for six months. There are two alternative ways of paying for your Range Rover.

a. Keep the funds at your bank in the US and buy €100,000 forward.

b. Buy a certain amount of € spot today and invest the amount in Germany for six months so that the maturity value becomes equal to €100,000. Evaluate each payment method in terms of $ cost. Which method would you prefer? Why?

4.Hamilton, Inc. bonds have a coupon rate of 11 percent. The interest is paid? semiannually, and the bonds mature in 8 years. Their par value is ?$1,000. If your required rate of return is 14?percent, what is the value of the? bond? What is the value if the interest is paid? annually?

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1.A)Invested cost 23100

Less front load 5% = 1155

B) investment value after load = 21945

Add return 10% = 2194.5

C) fund value after 1 year = 24139.5

Less operating expenses 1.6% = 386.232

D) value after fee = 23753.268

Return = D/A - 1 = 23753.268/23100 -1 = 2.83%

Option B is correct

2.Ans : Computation of 3 mnth forward rate using interest rates

  Swiss Franc USD
Spot Rate 1.25 1
Interest Rate 8%p.a 4% p.a
3 mnth Forward Price 1.275
[1.25 + (1.25 * 8% * 3/12)]
1.01
(1 + (1 * 4% * 3/12) ]
3 mnth Forward Rate 1.2624 (1.275 / 1.01) 1

a) Since the derived 3mth Forward rate (SF1.2624/$) and the market 3mth forward rate (SF1.25/$) are different, thus Interest Rate Parity is not holding

b) Assumed borrowed SF1,250,000 @ 8% p.a.
i) Will sell SF and buy $ in the market at spot rate of SF1.25/$ = Receive $1,000,000

ii) Invest $1,00,000 in the US market for 3 mnths @ 4% p.a.

iii) Enter into 3mnth forward USD Sell contract at SF 1.30 / $ for $1,010,000

After 3 Months

Interest on Investment = $1,000,000 * 4% * 3/12 = $10,000
Receive = $1,000,000 + $10,000 = $1,010,000

Will sell $1,010,000 at Forward Rate SF1.30/$ = Recevie SF1,313,000

Pay borrowing with 8% interest = SF 1,250,000 + (SF 1,250,000 * 8% * 3/12) = SF1,275,000

Arbitrage Gain = SF1,313,000 - SF1,275,000 = SF 38,000

3.

 Keep the funds at your bank in the US and buy €100,000 forward

cost of paying today =  €100,000 *$1.3/5€ =135,000 $

so deposit 135,000 $ at 3% p.a for 6 months

interest recieved after 6 months = pincipal *(1+r)n

=135,000 $ *1.5%

=2025

forward rate is $1.30/

payable in 6 months

gross cost of payable in 6 months= €100,000 *$1.30/€ =$130,000

less interest on deposit in ny city = $ 2,025

net payable =$130,000 -$ 2,025= $127,975

b)Buy a certain amount of € spot today and invest the amount in Germany for six months so that the maturity value becomes equal to €100,000

future value = €100,000

r= 4 p.a for 6 months is 2%

present value = future value / (1+R)n

=€100,000/1.02

=€98,039

converting € to $ using spot rate is

=€98,039*$1.35/€

=$132,353

we have payable we chose lower amount of payable ie $127,975

option a is preferable

give me positive rating , let me know if you need any information.

4.

If interest paid annually

Coupon = 0.11×1000 =110

Number of periods = 8

Rate = 14

Value of bond = coupon *[1-1/( 1+r )n]/r + FV/(1+r)n

=110 [1-1/(1+0.14)8]/0.14+1000/(1+0.14)8

= 110*[1-1/2.852586] /0.14+1000/2.852586

= 110*(1-0.350559/0.14+350.559106

= 110*(4.638864)+350.559106

= 510.2750+350.559106

value of bond = 860.83