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1
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 ?$1,000. If your required rate of return is 14?percent, what is the value of the? bond? What is the value if the interest is paid? annually?
Expert Solution
1.A)Invested cost 23100
Less front load 5% = 1155
B) investment value after load = 21945
Add return 10% = 2194.5
C) fund value after 1 year = 24139.5
Less operating expenses 1.6% = 386.232
D) value after fee = 23753.268
Return = D/A - 1 = 23753.268/23100 -1 = 2.83%
Option B is correct
2.Ans : Computation of 3 mnth forward rate using interest rates
| Swiss Franc | USD | |
| Spot Rate | 1.25 | 1 |
| Interest Rate | 8%p.a | 4% p.a |
| 3 mnth Forward Price | 1.275 [1.25 + (1.25 * 8% * 3/12)] |
1.01 (1 + (1 * 4% * 3/12) ] |
| 3 mnth Forward Rate | 1.2624 (1.275 / 1.01) | 1 |
a) Since the derived 3mth Forward rate (SF1.2624/$) 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
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