- A United States company expects to have to pay 1 million Canadian dollars in six months. Explain how the exchange rate risk can be hedged using (a) a forward contract and (b) an option.
- Suppose that USD-sterling spot and forward exchange rates are as follows:
What opportunities are open to an arbitrageur in the following situations?
- A 180-day European call option to buy £1 for $1.27 costs 2 cents.
(b) A 90-day European put option to sell £1 for $1.34 costs 2 cents.
- A company has a floating-rate liability that costs LIBOR plus 1%. Explain how it can use the quotes in Table 5.5 to convert this to a three-year fixed-rate liability.
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