1. **Problem 1: Estimating profits from borrowing USD and investing in NZD** Penaldo Bank borrows $3,000,000 USD at an annual borrowing rate of 7.20% for 180 days and converts it to NZD at the spot rate of $0.4525. The bank expects the NZD to appreciate to $0.4785 in 180 days and invests at the NZD lending rate of 5.20% annually. 2. **Formula and important rules:** - Interest for 180 days = Principal \times Rate \times \frac{180}{360} - Amount owed in USD after 180 days = Principal + Interest - Amount invested in NZD = USD borrowed / Spot rate - Amount received from NZD investment after 180 days = NZD invested + Interest - Convert NZD back to USD at expected future spot rate - Profit/Loss = USD received from NZD investment - USD owed 3. **Calculations:** - USD interest = $3,000,000 \times 0.072 \times \frac{180}{360} = $3,000,000 \times 0.072 \times 0.5 = $108,000 - USD owed after 180 days = $3,000,000 + $108,000 = $3,108,000 - NZD invested = $3,000,000 / 0.4525 \approx 6,633,165.83 NZD - NZD interest = 6,633,165.83 \times 0.052 \times 0.5 = 6,633,165.83 \times 0.026 = 172,462.31 NZD - NZD after 180 days = 6,633,165.83 + 172,462.31 = 6,805,628.14 NZD - USD from NZD after 180 days = 6,805,628.14 \times 0.4785 = $3,257,093.99 - Profit = $3,257,093.99 - $3,108,000 = $149,093.99 4. **Future spot rate for $100,000 profit:** Let future spot rate be $S$. Profit = NZD after interest \times S - USD owed = 100,000 $$6,805,628.14 \times S - 3,108,000 = 100,000$$ $$6,805,628.14 \times S = 3,208,000$$ $$S = \frac{3,208,000}{6,805,628.14} \approx 0.4713$$ 5. **Conclusion:** Penaldo Bank should pursue this strategy as it yields a profit of approximately $149,094. --- 1. **Problem 2: Net profit from call option on yen** Strike price = $0.0091, Premium = $0.00017, Spot at exercise = $0.0095, Units = 150,000,000 2. **Formula:** - Profit per unit = Max(Spot - Strike, 0) - Premium - Total profit = Profit per unit \times Units 3. **Calculations:** - Profit per unit = (0.0095 - 0.0091) - 0.00017 = 0.0004 - 0.00017 = 0.00023 - Total profit = 0.00023 \times 150,000,000 = $34,500 --- 1. **Problem 3: Effects on Canadian dollar value** a) High inflation in Canada generally decreases the value of the Canadian dollar because higher inflation reduces purchasing power and may lead to capital outflows. b) Imposing quotas on US imports reduces supply of US goods, potentially improving Canada's trade balance and increasing demand for CAD, which may increase its value. --- 1. **Problem 4: European-style put option on GBP** Strike price = $1.3550, Spot at maturity = $1.3556, Premium = $0.023 2. **Should the option be exercised?** - Put option is exercised if Strike > Spot at maturity. - Here, $1.3550 < 1.3556$, so option should NOT be exercised. 3. **Breakeven price:** - Breakeven = Strike price - Premium = 1.3550 - 0.023 = $1.3320 --- 1. **Problem 5: Conditional call option on GBP** Strike = $1.3650, Premium = $0.05 (paid only if GBP < $1.34), Trigger = $1.34 Price at time 0 = $1.3555, Price at expiration = $1.3733 2. **Premium payment:** - Since $1.3733 > 1.34$, premium is NOT paid. 3. **Profit/Loss:** - Buyer: No premium paid, option is in the money (spot > strike), so profit = Spot - Strike = 1.3733 - 1.3650 = $0.0083 per unit. - Seller: Loss = $0.0083 per unit. --- **Summary:** - Problem 1 profit: $149,093.99, future spot for $100,000 profit: $0.4713 - Problem 2 profit: $34,500 - Problem 3: Inflation lowers CAD value; quotas may increase CAD value - Problem 4: Do not exercise; breakeven $1.3320 - Problem 5: Buyer profit $0.0083/unit, seller loss $0.0083/unit