The spot exchange rate for the Polish zloty (PLN) is USD 0.2500 / PLN 1. The one

Question

The spot exchange rate for the Polish zloty (PLN) is USD 0.2500 / PLN 1. The one-year forwardexchange rate is USD 0.2529 / PLN. The one year LIBOR for U.S. dollars is 1.15475 %. Assumethat the market risk premium is 7.5%.

Suppose the unbiasedness hypothesis does not hold.   What is the expected payoff fromgoing short on one Polish zloty in the forward market? What is the payoff if PLNdepreciates by 2 standard deviations from the expectation, and the standard deviation ofexchange rate changes is 5%? (Round to four places to the right of the decimal.)

a. Expected Payoff: USD _________________ / PLN

b.  2 Standard Deviation Depreciation Payoff: USD _______________ / PLN

Explanation / Answer

The PLN is trading at forward premium.If one goes short on zloty in forward market and long on spot. the following gain is expected.

Forward price/ spot price -1 = 0.2529/0.2500 -1 = 0.0116 = 1.16%

The expected return is 0.2500* ( 1+ 1.15475%) = 0.25288 usd/pln

2. When there is a 2 standard deviation depriciation the expected payoff shall fall by 2 ×5%( standard deviation of the currency) = 10%

b. 0.2528× (1-10%) = 0.2275USD/PLN

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.