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【正文】 $10,500,000 3. Lend the dollars through the interbank market at % annualized over a 10day period. The amount accumulated in 10 days is: $10,500,000 [1 + (8% 10/360)] = $10,500,000 [] = $10,523,333 4. Repay the peso loan. The repayment amount on the peso loan is: MXP70,000,000 [1 + (% 10/360)] = 70,000,000 []=MXP70,169,167 5. Based on the expected spot rate of $.14, the amount of dollars needed to repay the peso loan is: MXP70,169,167 $.14 = $9,823,683 6. After repaying the loan, Blue Demon Bank will have a speculative profit (if its forecasted exchange rate is accurate) of: $10,523,333 – $9,823,683 = $699,650 b. Assume all the preceding information with this exception: Blue Demon Bank expects the peso to appreciate from its present spot rate of $.15 to $.17 in 30 days. How could it attempt to capitalize on its expectations without using deposited funds? Estimate the profits that could be generated from this strategy. ANSWER: Blue Demon Bank can capitalize on its expectations as follows: 1. Borrow $10 million 2. Convert the $10 million to pesos (MXP): $10,000,000/$.15 = MXP 66, 666,667 3. Lend the pesos through the interbank market at % annualized over a 30day period. The amount accumulated in 30 days is: MXP66,666,667 [1 + (% 30/360)] = 66,666,667 [] = MXP67,138,889 4. Repay the dollar loan. The repayment amount on the dollar loan is: $10,000,000 [1 + (% 30/360)] = $10,000,000 [] = $10,069,170 5. Convert the pesos to dollars to repay the loan. The amount of dollars to be received in 30 days (based on the expected spot rate of $.17) is: MXP67,138,889 $.17 = $11,413,611 6. The profits are determined by estimating the dollars available after repaying the loan: $11,413,611 – $10,069,170 = $1,344,441 23. Speculation Diamond Bank expects that the Singapore dollar will depreciate against the dollar from its spot rate of $.43 to $.42 in 60 days. The following interbank lending and borrowing rates exist: Currency Lending Rate Borrowing Rate . dollar % % Singapore dollar % % Diamond Bank considers borrowing 10 million Singapore dollars in the interbank market and 11 investing the funds in dollars for 60 days. Estimate the profits(or losses) that could be earned from this strategy. Should Diamond Bank pursue this strategy? ANSWER: Borrow S$10,000,000 and convert to . $: S$10,000,000 $.43 = $4,300,000 Invest funds for 60 days. The rate earned in the . for 60 days is: 7% (60/360) = % Total amount accumulated in 60 days: $4,300,000 (1 + .0117) = $4,350,310 Convert . $ back to S$ in 60 days: $4,350,310/$.42 = S$10,357,881 The rate to be paid on loan is: .24 (60/360) = .04 Amount owed on S$ loan is: S$10,000,000 (1 + .04) = S$10,400,000 This strategy results in a loss: S$10,357,881 – S$10,400,000 = –S$42,119 Diamond Bank should not pursue this strategy. 12 Chapter 5 2. Risk of Currency Futures. Currency futures markets are monly used as a means of capitalizing on shifts in currency values, because the value of a futures contract tends to move in line with the change in the corresponding currency value. Recently, many currencies appreciated against the dollar. Most speculators anticipated that these currencies would continue to strengthen and took large buy positions in currency futures. However, the Fed intervened in the foreign exchange market by immediately selling foreign currencies in exchange for dollars, causing an abrupt decline in the values of foreign currencies (as the dollar strengthened). Participants that had purchased currency futures contracts incurred large losses. One floor broker responded to the effects of the Fed39。s intervention by immediately selling 300 futures contracts on British pounds (with a value of about $30 million). Such actions caused even more panic in the futures market. a. Explain why the central bank s intervention caused such panic among currency futures traders with buy positions. ANSWER: Futures prices on pounds rose in tandem with the value of the pound. However, when central banks intervened to support the dollar, the value of the pound declined, and so did values of futures contracts on pounds. So traders with long (buy) positions in these contracts experienced losses because the contract values declined. b. Explain why the floor broker s willingness to sell 300 pound futures contracts at the going market rate aroused such concern. What might this action signal to other brokers? ANSWER: Normally, this order would have been sold in pieces. This action could signal a desperate situation in which many investors sell futures contracts at any price, which places more downward pressure on currency future prices, and could cause a crisis. c. Explain why speculators with short (sell) positions could benefit as a result of the central bank s intervention. ANSWER: The central bank intervention placed downward pressure on the pound and other European currencies. Thus, the values of futures contracts on these currencies declined. Traders that had short positions in futures would benefit because they could now close out their short positions by purchasing the same contracts that they had sold earlier. Since the prices of futures contracts declined, they would purchase the contracts for a lower price than the price at which they initially sold the contracts. d. Some traders with buy positions may have responded immediately to the central bank s intervention by selling futures contracts. Why would some speculators with buy positions leave their positions unchanged or even increase their positions by purchasing more futures contracts in response to the central bank s intervention? ANSWER: Central bank intervention sometimes has only a temporary effect on exchange rates. Thus, the European currencies could strengthen after a temporary effect c