6 questions on currencies: profits from triangular arbitrage, spread, bid rate, ask rate, Forward rates, exchange rate for portfolio valuation, interest rate parity

1. Donna Ackerman, CFA, is an analyst in the currency trading department at State Bank. Ackerman is training a new hire, Fred Bos, a recent college graduate with a BA in economics. Ackerman and Bos have the following information available to them: Spot Rates Bid Price Ask Price Euro/US$ 1.0000 1.0015 British Pound/US$ £2.0000 £2.0100 Ackerman and Bos are interested in pursuing profitable arbitrage opportunities for State Bank. Using the appropriate bid or ask rates for the Euro/US$ and the British pound/US$, and assuming the Euro/British pound rate is 0.4000/£, what will be the profits from triangular arbitrage, starting with $1,000? A) $250. ... click for more

Forward rates/law of one price

1. A currency trader has compiled the following currency quotes: USD/EUR ($/Euro USD/GBP ($/£) JPY/USD (¥) Spot rate $1.2139 $1.7730 115.674 6-month forward rate $1.2067 $1.7894 114.867 Which of the following statements regarding currencies is CORRECT? A) The pound is strong relative to the dollar and the dollar is strong relative to the yen. B) The euro is strong relative to the dollar and the yen is weak relative to the dollar. C) The euro is weak relative to the dollar and the yen is strong relative to the dollar. D) The dollar is strong relative to the pound and the dollar is weak relative to t... click for more

Levered and unlevered firms

a) Firm A is an all equity financed firm. Its current equity price is £1.06 cum dividend. Also, its current earnings per share (eps) and current dividend payment are 20p and 12p, respectively. The market expects the ratio of eps to dividend to stay the same in the future. Firm A's rate of return on reinvested funds is equal to its equity cost of capital. Estimate firm A's cost of capital. b) Firm B has the same business risk as firm A and it is also all equity financed. Firm B's current market capitalization is £25 million. It makes no profit currently, but is expected to make a constant profit of £1 million two and three years from now. All profits are paid out as dividends in the sec... click for more

Factoring Receivables

A firm has an average collection period of 48 days. Current practice is to factor all receivables immediately at a 2 percent discount. What is the effective cost of borrowing in this case, assuming the default is extremely unlikely?

Present and future value calculations

Your uncle has given you three alternatives for your inheritance. You can have $5,000 now; $1,000 per year for the next eight years; or $12,000 at the end of eight years. You assume your opportunity cost or discount rate is 11% interest annually. 1. Which inheritance alternative would be best? Why? 2. Would your decision be different if you could earn interest at 13%? 3. Would your decision be different if you knew the economy was declining and the risk of non-payment eight years from now was risky?