FIN4802 Assignment 1 ALL SOLUTION SPRING FALL-2022 LATEST 100% CORRECT GUARANTEED GRADE A+
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Module
FIN 4802 (FIN4802)
Institution
University Of South Africa
Question 1
James Clark is a foreign exchange trader with Citibank. He notices the following quotes.
Spot exchange rate SFr1.2051/US$
1 year forward exchange rate SFr1.1922/US$
1 year US$ interest rate 1.25% per year
1 year SFr interest rate 3.75% per year
1.1 Is the interest rate parity h...
james clark is a foreign exchange trader with citibank he notices the following quotes spot exchange rate sfr12051us 1 year forward exchange rate sfr11922us 1 year us interest rate 125 per
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FIN 4802 (FIN4802)
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FIN4802 Assignment 1 ALL SOLUTION SPRING
FALL-2022 LATEST 100% CORRECT
GUARANTEED GRADE A+
Question 1
James Clark is a foreign exchange trader with Citibank. He notices the following quotes.
Spot exchange rate SFr1.2051/US$
1 year forward exchange rate SFr1.1922/US$
1 year US$ interest rate 1.25% per year
1 year SFr interest rate 3.75% per year
1.1 Is the interest rate parity holding? You may ignore transaction costs. [2]
1.2 Is there an arbitrage opportunity? If yes, show what steps need to be taken to
make arbitrage profit. Assuming that James Clark is authorized to work with
US$1 000 000, compute the arbitrage profit in dollars. [10]
Question 2
2.1 A call option allows the holder to buy US$100 000 at an exercise exchange rate of
1.8000 (AUD/US$). If the premium paid is 0.5 Australian cents for each US$,
calculate the net payoff at the following spot exchange rates:
(a) 1.8040 [1]
(b) 1.8260 [1]
(c) 1.7870 [1]
(d) At what exchange rate will the holder break even? [2]
2.2 A put option allows the holder to sell NOK250 000 at an exercise exchange rate of
0.190 (AUD/NOK). If the premium paid is 0.4 Australian cents for each NOK, calculate
the net payoff at the following spot exchange rates:
(a) 0.200 [1]
(b) 0.192 [1]
(c) 0.180 [1]
(d) At what exchange rate will the holder break even? [2]
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