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Use currency derivatives to speculate or hedge in the foreign exchange market to solve the following problems:
Problem 1:
An investor wishes to buy euros spot (at $0.9080) and sell euros forward for 180 days (at $0.9146).
a. What is the swap rate on euros?
b. What is the forward premium or discount on 180-day euros?
Problem 2:
Suppose the euro is quoted at 0.7064-80 in London and the pound sterling is quoted at 1.6244-59 in Frankfurt.
a. Is there a profitable arbitrage situation? Describe it.
b. Compute the percentage bid-ask spreads on the pound and euro.
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John Fleming has been shopping for a loan to finance the buy of a used car. He has found three possibilities that seem attractive and wishes to choose one with the lowest interest rate.
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