Mr James Lucky, a British investor, is considering a five-year investment on zero-coupongovernment bonds. Currently, the annual yield to maturity of British, German and Chinesezero-coupon government bonds maturing in five years is 3%, 5% and 7%, respectively. Thespot exchange rate between the GBP and the Euro is £:€ = 1.18, while between the GBPand the CNY is £:CNY = 8.58. According to Mr Lucky's forecasting models, the spotexchange rates are expected to be £:€ = 1.37 and £:CNY = 8.25 in three years from today.%3DWhich of the three bonds would provide the highest cumulative return for Mr Lucky overthe next five years, if the exchange rate forecasts turn out to be correct? Provide allyour workings and full calculations, when answering this question.ii) What is the GBP to CNY rate (three-year) forecast that would make Mr Lucky indifferentbetween investing in either the British or the Chinese bond today? Provide all yourworkings and full calculations, when answering this question.

British Zero-Coupon Bond: This is a straightforward calculation since there's no currency exchange…

Mr James Lucky, a British investor, is considering a five-year investment on zero-coupon government bonds. Currently, the annual yield to maturity of British, German and Chinese zero-coupon government bonds maturing in five years is 3%, 5% and 7%, respectively. The spot exchange rate between the GBP and the Euro is £:€ = 1.18, while between the GBP and the CNY is £:CNY = 8.58. According to Mr Lucky's forecasting models, the spot exchange rates are expected to be £:€ = 1.37 and £:CNY = 8.25 in three years from today. Which of the three bonds would provide the highest cumulative return for Mr Lucky over the next five years, if the exchange rate forecasts turn out to be correct? Provide all your workings and full calculations, when answering this question. ii) What is the GBP to CNY rate (three-year) forecast that would make Mr Lucky indifferent between investing in either the British or the Chinese bond today? Provide all your workings and full calculations, when answering this question.

Mr James Lucky, a British investor, is considering a five-year investment on zero-coupon government bonds. Currently, the annual yield to maturity of British, German and Chinese zero-coupon government bonds maturing in five years is 3%, 5% and 7%, respectively. The spot exchange rate between the GBP and the Euro is £:€ = 1.18, while between the GBP and the CNY is £:CNY = 8.58. According to Mr Lucky's forecasting models, the spot exchange rates are expected to be £:€ = 1.37 and £:CNY = 8.25 in three years from today. Which of the three bonds would provide the highest cumulative return for Mr Lucky over the next five years, if the exchange rate forecasts turn out to be correct? Provide all your workings and full calculations, when answering this question. ii) What is the GBP to CNY rate (three-year) forecast that would make Mr Lucky indifferent between investing in either the British or the Chinese bond today? Provide all your workings and full calculations, when answering this question.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter27: Multinational Financial Management

Section: Chapter Questions

Problem 7MC

See similar textbooks

Similar questions

The nominal yield on 6-month T-bills is 7%, while default-free Japanese bonds that mature in 6 months have a nominal rate of 5.5%. In the spot exchange market, 1 yen equals $0,009. If interest rate parity holds, what is the 6-month forward exchange rate?
IBM is considering having its German affiliate issue a 10-year, $100 million bond denominated in euros and pricedto yield 7.5%. Alternatively, IBM’s German unit can issuea dollar-denominated bond of the same size and maturityand carrying an interest rate of 6.7%.a. If the euro is forecast to depreciate by 1.7% annually, what is the expected dollar cost of the eurodenominated bond? How does this compare to the costof the dollar bond?b. At what rate of euro depreciation will the dollar cost ofthe euro-denominated bond equal the dollar cost of thedollar-denominated bond?c. Suppose IBM’s German unit faces a 35% corporate taxrate. What is the expected after-tax dollar cost of theeuro-denominated bond?
An investor has $10m to invest and has the following options: 1) depositing it in a US bank account paying 3% annually, or 2) depositing it in a German bank, where the annual rate of interest is only 2%. Assume that today the current spot exchange rate for the Euro is given as $1.2750, while the 1-year Dollar-Euro forward rate is posted as 1.2995. a. Based on your knowledge of the relationship between interest rate differentials and the current dollar-euro forward premium or discount, in which country should the investor deposit her money? why? b. If you had the power to adjust the German interest rate, with all else constant, what rate would you establish, such that the investor is totally indifferent between depositing in either countries? Show your work and the logic behind it.
The current exchange rate is 1.1 dollars per euro. A 5-year U.S.government bond has a 3% yield, and a 5-year French governmentbond has a yield of 4%. What is the expected 5-year forward rate?(1.0481 dollars per euro)
Assume that you are a U.S. investor. The nominal return on a U.S. bond is 5% and the nominal return on a German bond is 6%. Both bonds mature in one year. The current exchange rate is 1.18 €/$. If uncovered exchange rate parity holds, you would expect the exchange rate a year from now to be €/$. (Round your response to two decimal places.) As a U.S. investor you exchange dollars for euros and purchase the German bond today. One year from now, it turns out that the exchange rate, E, is actually 0.98 (1 dollar = 0.98 euros). Your realized return in dollars is %. (Enter your response as a whole number.) Investing in the U.S. bond would have yielded %. (Enter your response as a whole number.) Are the differences in rates of return consistent with the uncovered interest rate parity condition? O A. Such differences in interest rates demonstrate that the uncovered interest parity does not hold. O B. Investors would never expect the currency to appreciate if it is going to depreciate in…
A British money financier is managing €10 million and wants to invest it in safe bonds either in France or United Kingdom for one year. The one-year interest rate on such assets is 0.63% in Britain and 0% in France. The one-year forward euro-pound exchange rate is 1.121 €/£ (euros per pound). Assume that the covered interest parity condition (CIP) always holds and to ensure consistency, treat the UK as home country. The current euro-pound spot exchange rate is calculated to be 1.1281... Suppose the financier believes that the uncovered interest parity (IP) condition also holds and the foreign exchange market participants are acting based on correct expectations about future spot euro-pound exchange rate in the sense that their expectations predict the future rate without bias. Given these assumptions, what is the one-year expected spot euro-pound exchange rate prevailing in the market? Now suppose that the financier believes that while the uncovered interest parity (IP) condition…
In the spot market, 1 Philippine peso can be exchanged for 2.51 Japanese yen. In the 1-year forward market, 1 Philippine peso can be exchanged for 2.53 Japanese yen. The 1-year, risk-free rate of interest is 5 percent in the Philippines. If interest rate parity holds, what is the yield today on 1-year, risk-free Japanese securities?
The following information is the same for Questions 19 - 20. Currently, the spot exchange rate is USD/AUD = 0.85, and the one-year forward exchange rate is USD/AUD = 0.90. One-year risk-free interest rate is 5.5 % in Australia and 3.2% in the United States. You are the U.S. investor evaluating whether there is an opportunity for a covered interest rate arbitrage. You may borrow up to 1,000,000 USD or 1,176,470 AUD. Compute the risk-free arbitrage profit. 85,058 USD O45, 058 USD 38 USD 68,563 USD
The US 1 year spot rate is 3.61% and the Mexican 1 year spot rate is 7.44%. A US investor purchases a Mexican corporate bond with an expected 1 year return of 9.76%, as measured in Mexican peso. The current USD/MXP exchange rate is 0.18. If the investor decides to hedge the currency risk exposure in the forward market, what would be the expected return on this portfolio, if interest rate parity holds?
Suppose the annual interest rates in the U.S. (home nation) and the U.K (foreign nation) are 8% and 6%, respectively. A U.K. interest arbitrager decides to invest £10,000 in the U.S for three months. Given that the current spot rate is $2 per pound, calculate the EUD from investing in the U.S., assuming that on the maturity date the U.S. dollar is expected to depreciate by 1%. Interpret your result.
Is it profitable for a US bank to issue $200 million of one-year bonds in the US at 6.5% to invest it in one-year Brazilian government bond paying an annual interest rate of 8%, if current spot rate is 1.0537 BRL/USD and expected spot rate in a year from now is 0.9875 BRL/ USD? Does it make sense to use forward contract?
Suppose that the term structure of risk-free interest rates is flat in the United States and Australia. The USD interest rate is 7% per annum and the AUD rate is 9% per annum. The current value of the AUD is 0.62 USD. Under the terms of a swap agreement, a financial institution pays 8% per annum in AUD and receives 4% per annum in USD. The principals in the two currencies are $12 million USD and 20 million AUD. Payments are exchanged every year, with one exchange having just taken place. The swap will last two more years. What is the value of the swap to the financial institution? Assume all interest rates are continuously compounded.