question archive Question 3: Bank of Maldives expects that Maldives Rufiyaa (MVR) will appreciate against Bangladeshi Taka (BDT) from its spot rate of 5

Question 3: Bank of Maldives expects that Maldives Rufiyaa (MVR) will appreciate against Bangladeshi Taka (BDT) from its spot rate of 5

Subject:FinancePrice:2.86 Bought3

Question 3:

Bank of Maldives expects that Maldives Rufiyaa (MVR) will appreciate against Bangladeshi Taka (BDT) from its spot rate of 5.50 to 5.70 in 45 days. The following annual interbank lending and borrowing rates exist:

Country

Lending Rate

Borrowing Rate

Maldives

10.70%

11.50%

Bangladesh

5.50%

6.50%

Assume Bank of Maldives has a borrowing capacity of either 1 million MVR or 5 million BDT in the interbank market, depending on which currency it wants to borrow. How could Bank of Maldives attempt to capitalize on its expectations without using deposited funds? Estimate the profits that could be generated from this strategy. (Show all necessary calculations and the steps in this speculation strategy).

Question 4:

The following information is currently available for 1000 British Pound (GBP) option expiring in a month:

Put Option Strike Price= 40 Thai Baht (THB)

Put Option Premium= 2 Baht per unit

Call Option Strike Price= 38 Thai Baht (THB)

Call Option Premium= 1 Baht per unit

Put Option with the same exercise price has a premium of 1 Baht per unit

Current Spot Rate= 39 Baht

Required

A. What is the total profit/loss for the buyer of the British Pound Straddle if GBP depreciates by 6% in one month? (Show all necessary calculation and mention that the option will be exercised or not. Just calculation is not enough. Please mention your steps.) (2)

B. What is the total profit/loss for the buyer of the British Pound Strangle if GBP appreciates by 8% in one month? (Show all necessary calculation and mention that the option will be exercised or not. Just calculation is not enough. Please mention your steps.) (2)

Part B: Short Questions & Graphs

 

pur-new-sol

Purchase A New Answer

Custom new solution created by our subject matter experts

GET A QUOTE

Answer Preview

Q - 3

Step 1 : Borrow 5 million BDT for 45 days. Assume 360 days in a year.

Amount to be paid back on maturity = P x (1 + r x n / 360) = 5,000,000 x (1 + 6.50% x 45/360) =  5,040,625 BDT

Step 2: Convert the amount immediated to MVR using spot rate.

Amount in MVR = P / S = 5,000,000 / 5.50 = MVR  909,091

Step 3: Lend it @ 10.70% for 45 days.

Matuirty amount = Principal + interest =  909,091 +  909,091 x 10.70% x 45/360 = MVR  921,250

Step 4: Covert this amount back to BDT using the forward rate F = 5.70

Amount in BDT =  921,250 x 5.70 = BDT 5,251,125

Step 5: Pay the maturity amount due to borrowing in step 1 and thus make the profit =  5,251,125 - 5,040,625 = BDT  210,500

Thus a profit of BDT  210,500 can be generated using this strategy.

Sitejabber (5.0)

Merchant Circle (4.8)

Trustpilot (4.6)

Study Help Me (4.9)

Related Questions