Question

I need help with problem 3 only, please show all the calculations with details, don't just list numbers or put them on a table using excel. I need to understand how did you get each thing. Thanks

HUBE 466-566-P12020(2) - Compatibility Mode 18109361685 0 - 0 X File Home Insert Draw Design Layout References Mailings Review View Help Tell me what you want to do Share Comments .T .XIIII.1.IIII.2. IIII.3. III.4IIIII.5. III.6''T'.7 Problem 4. (3 points) A U.S. investor has $200,000 to invest for one year, and is considering investing internationally if the dollar proceeds in one year are higher from any foreign investments than from an investment in the U.S. at the one-year money market rate of 2.00%. The investor has the following information about current ex-rates, one-year forward rates, and one-year money-market rates in the U.S. and four other countries. Assume that there are no differences in default risk for the one-year money market investments and ignore taxes. When investing internationally, we'll assume that the investor will convert $200,000 into the foreign currencies at the current spot ex-rate, invest at the one-year foreign money-market interest rate for one year, and then cover ex-rate risk by entering today into a one-year forward contract to sell the foreign-denominated proceeds in one year back to USDs, at the listed one-year forward rates. Country 1-Year Interest rate Spot Ex-rate 1-Year Forward Rate U.S. 2.00% UK 2.25% $1.5796/£ $1.5832/£ Japan 0.675% ¥88.1205/$ ¥87.0405/$ Mexico 6.40% MXN12.2755/$ MXN12.8226/$ Germany 1.50% $1.3428/€ $1.3525/€ a. For the U.S., calculate your total (gross) dollar proceeds at the end of one year. b. For the UK, Japan, Mexico and Germany, convert $200,000 into the foreign currency at the current ex-rate, invest that amount of foreign currency for one-year at the foreign interest rate, and then sell your total gross proceeds in the foreign currencies back into USDs (Ss) at the one-year forward rate. c. For the five investment options, report and rank the total gross USD proceeds in one year, from the highest to the lowest amount. Problem 3. (2 points) Assume you observe the following spot ex-rates and one-year forward ex-rates (do not reverse any of the quotes, and you can use the percentage change function on your calculator): SHOW ALL WORK Currency Spot Rate (January 2020) Forward Rate (January 2021) a. Euro $1.1052/€ $1.2560/€ b. Mexican peso (MXN) MXN19.5905/$ MXN22.2775/$ c. British Pound $1.3350/£ $1.3020/£ d. Japanese Yen ¥109.2802/S ¥116.3225/$ For each of the four currencies above, separately calculate and report the one-year forward annual discount ) or premium (%) as a percentage (to 2 decimal places), and explain in words which of the two currencies is trading at a one-year forward premium in the forward market, and by how much %)—the USD ($) or the foreign currency — and which of the two currencies is trading at a one-year forward discount and by how much (%)-the USD or the foreign currency - in the forward market. Please show answers separately for each currency (a, b, c and d), and do not combine answers. You can use the CHG function on your HP financial calculator Page 2 of 2 902 words DX E -— + 100% o @ @ @ 09 wi _ 3:13 AM 1/13/2020 I

Answer 1

	In the given problem Home Currency is USD($).
	Therefore,
	For Direct Quote
	Relationship	Appreciation	Depreciation
	Forward Rate(F) > Spot Rate(S)	Foreign Currency	Home Currency
	Forward Rate(F) < Spot Rate(S)	Home Currency	Foreign Currency
	For Inirect Quote
	Relationship	Appreciation	Depreciation
	Forward Rate(F) > Spot Rate(S)	Home Currency	Foreign Currency
	Forward Rate(F) < Spot Rate(S)	Foreign Currency	Home Currency
	Appreciation means Currency is at Premium and Depreciation means
	Currency is at Discount.
	Formula for Premium or Discount
	In case of Direct Quote	= (F-S)/S x 12/n x 100
	In case of Indirect Quote	= (S-F)/F x 12/n x 100
	Where,
	F = Forward Rate
	S = Spot Rate
	n = No of Months of Forward Conntract.
a.	Euro
	Spot Rate (S) = $1.1052 / €
	Forward Rate (F) = $1.2560 / €
	Home Currency is USD so this is a Direct Quote.
	As per Direct Quote, when F>S Foreign Currency i.e. Euro is appreciating and Home
	Currency i.e. USD is depreciating.
	That means Euro is at premium and USD is at discount in 1 year Forward Market.
	As per Direct Quote,
	% of Forward Discount = (F-S)/S x 12/n x 100
	=($1.2560 - $1.1052)/$1.1052 x 12/12 x 100
	=13.64%
b.	Mexican Peso (MXN)
	Spot Rate (S) = MXN19.5905/$
	Forward Rate (F) = MXN22.2775/$
	Home Currency is USD so this is a Indirect Quote.
	As per Indirect Quote, when F>S Home Currency i.e. USD is appreciating and Foreign
	Currency i.e. Mexican Peso is depreciating.
	That means USD is at premium and Mexican Peso is at discount in 1 year Forward Market.
	As per Indirect Quote,
	% of Forward Premium = (S-F)/F x 12/n x 100
	=(MXN19.5905 - MXN22.2775)/MXN22.2775 x 12/12 x 100
	=12.06%
c.	British Pound
	Spot Rate (S) = $1.3350/£
	Forward Rate (F) = $1.3020/£
	Home Currency is USD so this is a Direct Quote.
	As per Direct Quote, when F<S Home Currency i.e. USD is appreciating and Foreiegn
	Currency i.e. British Pound is depreciating.
	That means USD is at premium and British Pound is at discount in 1 year Forward Market.
	As per Direct Quote,
	% of Forward Premium = (F-S)/S x 12/n x 100
	=($1.3020 - $1.3350)/$1.3350 x 12/12 x 100
	=2.47%
d.	Japanese Yen
	Spot Rate (S) = ¥109.2802/$
	Forward Rate (F) = ¥116.3225/$
	Home Currency is USD so this is a Indirect Quote.
	As per Indirect Quote, when F>S Home Currency i.e. USD is appreciating and Foreign
	Currency i.e. Japanese Yen is depreciating.
	That means USD is at premium and Japanese Yen is at discount in 1 year Forward Market.
	As per Indirect Quote,
	% of Forward Premium = (S-F)/F x 12/n x 100
	=(¥109.2802 - ¥116.3225)/¥116.3225 x 12/12 x 100
	=6.05%