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Details of the tasks 4 al 835 + Compose 1
Details of the tasks 4 al 835 + Compose 1. (no Inbox 19 On 1 May 2019, two counterparties, A and B, sign a forward contract whereby A buys USD 2 million against the Stirling pound at a forward rate of 0.8009 GBP/USD and with a delivery date of 30 August 2019. Who will tend to default if the spot exchange rate on 30 August 2019 assumes the following values: (30 marks) Starred nagm. 10:27 AM (2 hours ago Snoozed a) 0.8020 Important b) 0.8001 Sent Drafts c) 0.8009 Meet Start a meeting Join a meeting 2. Assume that the spot exchange rate of the 0.1131 GBP/CNY. How will this spot rate adjust according to PPP if the China experiences an inflation rate of 5 percent while the UK experiences an inflation rate of 2 percent? (Hint: PPP Updated August 2016 Hangouts ????? Projects Team (1) can you please share samples Komalpreet Kaur E (S.) (1+1) S (1+1)/30 marks) formula: Expers World You She speration team se All calor 3. Parity relations play an important role in International Finance. Explain
Expert Solution
1)Forward Contract Notional = USD 2,000,000
Forward exchange rate = 0.8009 GBP / USD
Counterpart A is short on the GBP/USD forward contract since it wants to buy USD and wants a fixed exchange rate.
a)If the future spot rate turns out to be 0.8020
At the future spot rate of 0.8020, Counterparty B is likely to default since it has to locked in a rate of 0.8009 to sell USD 2 million to Counterpart A
Counterpart B's opportunity cost in the forward contract = (Future Spot rate - Forward exchange rate) * Notional
Counterpart B's opportunity cost in the forward contract = (0.8020 - 0.8009) * $2,000,000 = 2,200
b)If the future spot rate turns out to be 0.8001
At the future spot rate of 0.8001, Counterparty A is likely to default since it has to locked in a rate of 0.8009 to buy USD 2 million from Counterpart B
Counterpart A's opportunity cost in the forward contract = (Forward exchange rate - Future Spot rate) * Notional
Counterpart A's opportunity cost in the forward contract = (0.8009 - 0.8001) * $2,000,000 = 1,600
b)If the future spot rate turns out to be 0.8009
At the future spot rate of 0.8009, Neither party is going to default since the future spot rate = Forward rate
Counterpart A's opportunity cost in the forward contract = (Forward exchange rate - Future Spot rate) * Notional
Counterpart A's opportunity cost in the forward contract = (0.8009 - 0.8009) * $2,000,000 = 0
2)Spot rate = 0.1131 GBP/CNY
China inflation rate = 5%
UK inflation rate = 2%
As per the purchasing power parity condition
Expected future spot rate = Spot rate GBP/CNY * ((1 + UK inflation rate) / (1 + China inflation rate))
Expected future spot rate = 0.1131 * (( 1 + 2%) / (1 +5%))
Expected future spot rate = 0.109868 GBP/CNY
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