1. The spot price for gold is $2,000 per ounce. The dividend yield on the S&P 50
ID: 2790489 • Letter: 1
Question
1. The spot price for gold is $2,000 per ounce. The dividend yield on the S&P 500 is 7.0%. The risk-free interest rate is 8.0%. The futures price for gold for a 6-month contract on gold should be __________.
A. $1,957.24
B. $2,021.33
C. $2,006.29
D. $2,009.98
2. If the current exchange rate is $1.90/£, the one-year forward exchange rate is $1.95/£, and the interest rate on British government bills is 10.00% per year, what risk-free dollar denominated return can be locked in by investing in the British bills?
Risk-free Return = ?
3. Suppose the 1-year risk-free rate of return in the United States is 6.3% and the 1-year risk-free rate of return in Britain is 9.3%. The current exchange rate is $1 = 0.70. A 1-year future exchange rate of __________ would make a U.S. investor indifferent between investing in the U.S. security and investing in the British security.
A. 0.7198
B. 0.6914
C. 0.7178
D. 0.7205
4. The yield on a 1-year bill in the United Kingdom is 7.2%, and the present exchange rate is 1 pound = US$3.12. If you expect the exchange rate to be 1 pound = US$3.04 a year from now, the return a U.S. investor can expect to earn by investing in U.K. bills is approximately __________.
A. 4.00%
B. 4.00%
C. 4.45%
D. 9.82%
5. The risk-free interest rate in the United States is 8%, while the risk-free interest rate in the United Kingdom is 15%. If the 1-year futures price on the British pound is $2.40, the spot market value of the British pound today should be __________.
A. $1.93
B. $2.22
C. $2.56
D. $2.76
3. Suppose the 1-year risk-free rate of return in the United States is 6.3% and the 1-year risk-free rate of return in Britain is 9.3%. The current exchange rate is $1 = 0.70. A 1-year future exchange rate of __________ would make a U.S. investor indifferent between investing in the U.S. security and investing in the British security.
A. 0.7198
B. 0.6914
C. 0.7178
D. 0.7205
4. The yield on a 1-year bill in the United Kingdom is 7.2%, and the present exchange rate is 1 pound = US$3.12. If you expect the exchange rate to be 1 pound = US$3.04 a year from now, the return a U.S. investor can expect to earn by investing in U.K. bills is approximately __________.
A. 4.00%
B. 4.00%
C. 4.45%
D. 9.82%
5. The risk-free interest rate in the United States is 8%, while the risk-free interest rate in the United Kingdom is 15%. If the 1-year futures price on the British pound is $2.40, the spot market value of the British pound today should be __________.
A. $1.93
B. $2.22
C. $2.56
D. $2.76
Explanation / Answer
1)
future price = spot price * (1 + riskfree rate - dividend yield)T
future price = 2000*(1+8%-7%)0.5 = 2009.98 (Option D)
2)
Forward = Spot*(1 + domestic rate) / (1 + foreign rate)
if 1 currency p = 0.xxx currency q
Here leftside p is foreign and rightside q are domestic
1 Euro = 1.9 $
Fwd Euro = 1.95 $
1.95 = 1.9*(1+US interest rate) / (1+10%)
US interest rate = (1.95*1.1/1.9) - 1 = 12.89%
3)
future rate = 0.7*(1+9.3%) / (1+6.3%) = 0.7198 (Option A)
4)
3.04 = 3.12*(1+r) / (1+7.2%)
r = (3.04*1.072 / 3.12) - 1 = 4.45% (Option C)
5)
2.4 = S*(1+8%) / (1+15%)
S = 2.4*(1+15%) / (1+8%) = 2.56 (Option C)
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