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    A) The Following Is The Iphone 7 Price List and The Spot Exchange Rate For Both Countries

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    DR Luotan
    1) The law of one price does not hold based on the different iPhone 7 prices in different countries and their spot exchange rates. 2) A futures hedge would result in a profit if the March 1st spot rate was higher than the futures rate of RM4.50 per dollar since the reseller longed US dollars by entering the futures contract. 3) Interest rate parity states that the forward exchange rate should compensate for interest rate differences between two currencies to equalize expected returns and keep the cost of borrowing the same across countries. The example showed the forward rate adjusting to make up for a 3% interest rate differential.

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    A) The Following Is The Iphone 7 Price List and The Spot Exchange Rate For Both Countries

    Uploaded by

    DR Luotan
    43 views10 pages
    1) The law of one price does not hold based on the different iPhone 7 prices in different countries and their spot exchange rates. 2) A futures hedge would result in a profit if the March 1st spot rate was higher than the futures rate of RM4.50 per dollar since the reseller longed US dollars by entering the futures contract. 3) Interest rate parity states that the forward exchange rate should compensate for interest rate differences between two currencies to equalize expected returns and keep the cost of borrowing the same across countries. The example showed the forward rate adjusting to make up for a 3% interest rate differential.

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    Tut6

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    1) The law of one price does not hold based on the different iPhone 7 prices in different countries and their spot exchange rates. 2) A futures hedge would result in a profit if the March 1st spot rate was higher than the futures rate of RM4.50 per dollar since the reseller longed US dollars by entering the futures contract. 3) Interest rate parity states that the forward exchange rate should compensate for interest rate differences between two currencies to equalize expected returns and keep the cost of borrowing the same across countries. The example showed the forward rate adjusting to make up for a 3% interest rate differential.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    43 views10 pages

    A) The Following Is The Iphone 7 Price List and The Spot Exchange Rate For Both Countries

    Uploaded by

    DR Luotan
    1) The law of one price does not hold based on the different iPhone 7 prices in different countries and their spot exchange rates. 2) A futures hedge would result in a profit if the March 1st spot rate was higher than the futures rate of RM4.50 per dollar since the reseller longed US dollars by entering the futures contract. 3) Interest rate parity states that the forward exchange rate should compensate for interest rate differences between two currencies to equalize expected returns and keep the cost of borrowing the same across countries. The example showed the forward rate adjusting to make up for a 3% interest rate differential.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 10

    Question 1

    a) The following is the iphone 7 price list and the spot exchange rate for both countries.

    Justify whether law of one price hold?

    No, law of one price does not hold.

    b) Refer to the above question, answer the question below:

    Assuming now is 1 January

    A Malaysian apple products reseller is due to pay US$12million on 1 March

    March futures are trading at RM4.50 per dollar

    Standard contract size is 100,000 USD

    What is the result of a futures hedge if on 1 March the spot rate is RM4.80 per US$?
    Risk is what u worry,

    U pay to other ppl (apple reseller) USD 12 million

    U pay usd 12 million, u pay now can use spot price 12mil, but is two months time

    Worry usd appreciate, cuz u have to pay more, so they long usd.

    We worry usd appreciate

    Receive usd, worry usd depreciate alrd

    Purchasing power and interest rate parity

    Question 2

    Assume that the spot exchange rate is S 0  = 24.94 yen per ringgit Malaysia and the expected
    annual inflation rate for the Malaysia is 6.23%, and the annual expected Japanese inflation rate is
    1.35%. Compute the exchange rate after 6 month. (MYR/JPY)

    If compute the exchange rate after 1 year=23.79.


    This two can accept.

    Question 3

    Explain the interest rate parity with appropriate example.

    Under law of one price. SGD 106 x 2.9151 = 309. Interest rate differential. Net difference will be
    adjusted 3% via forward rate. So forward rate make up the difference. After u calculate with
    example, u can have concolusion, high interest rate will have a depreciated forward rate. Forward
    rate was initially RM3, now is 2.9151. last time 3, now 2.9151. difference is adjustment of forward
    rate. Not a prediction of future exchange rate. Merely adjustment of interest rate differentials.
    exchange rate in future will be adjust based on changes in certain factor like demand and supply.
    Law of one price only say yield is same if they have same risk. Shud be adjusted via interest rate.

    Question 4

    Today’s market price for 1 USD = 4.37 MYR

    Given the following interest rates for the two currencies:

    USD= 1% per annum

    MYR= 3% per annum

    a) Calculate the forward rate of USD/MYR

    4.4565, if 1 pip diff then still deemed correct. Forward – spot = positive (premium)

    b) Determine whether the swap point is at par, premium, or discount.

    Premium

    Question 5
    a) Compute the 6-month forward bid rate

    this one also can

    USD/MYR , Currency must be quoted in pairs.

    b) Explain the forward discount and forward premium with appropriate example.
    When quoted currency has lower interest currency than base currency, will get a discount.
    Now I want to buy crude palm oil, I cannot go bursa malaysia. Malaysia can only trade a few
    derivative, like fbm klci, …
    Exchange will have the list of approved brokers – smth like buy share from maybank, but
    channel the order into one centralised market.
    Question 6
    a) Compute the bid rate of 6-month GBP/MYR.

    b) Compute the offer rate of 3-month SGD/MYR.

    c) Compute the bid rate of 9-month AUD/MYR.

    d) Compute the offer rate of 6 month USD/MYR.


    Ans no need put myr alrd, cuz alrd know quoted in ringgit.

    Convergence property at the settlement, there is no time difference, spot=future.

    Compare the brokers, which one is better.

    When u short sell, sell the spot without forking out money to arbitrage

    Lon

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