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The treasurer of a middle market, import-export company has approached you for




Question;PROBLEM 10 (a-c) The treasurer of a middle market, import-export;company has approached you for advice on how to best invest some ofthe;firm's short-term cash balances. The company, which has been a client of;the bank that employs you for a few years,has $250,000 that it is able;to commit for a one-year holding period. The treasurer is currently;considering two alternatives:(1) invest all the funds in a one-year U.S. Treasury bill offering a bond equivalent yield of 4.25%, and (2) invest all the funds in a Swiss government security over the same horizon, locking in the spot andforward currency exchanges in the FX market. A quick call to the bank's FX desk gives you thefollowing two-way currency exchange quotes.Swiss France Per U.S. Dollar Per U.S. Dollar Swiss Franc (CHF) Spot 1.5035 0.6651 1-year CHF Futures ------- 0.6586 a.;Calculate the one-year bond equivalent yield for the Swiss government;security that would support the interest rate parity condition.b.;Assuming the actual yield on a one-year Swiss government bond is 5.50;percent, which strategy would leave the treasurer with the greatest;return after one year?c. Describe the transactions that an;arbitrageaur could use to take advantage of this apparent mispricing;and calculate what the profit would be for a $250,000 transaction.


Paper#52477 | Written in 18-Jul-2015

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