# 1 a The rate of interest available on a one-year government bond in Canada is 5 per cent. A…

1 a The rate of
interest available on a one-year government bond in Canada is 5 per cent. A
similar-risk bond in

Australia yields 7 per cent. The current spot rate of
exchange is C\$1.02/A\$. What will be the one-year forward

rate if the market obeys the interest rate parity
theory?

b Describe the expectation theory of foreign exchange.

2* (Examination
level)
Lozenge plc has taken delivery of 50,000 electronic devices from a Malaysian
company. The

seller is in a strong bargaining position and has
priced the devices in Malaysian dollars at M\$12 each. It has granted

Lozenge three

1 a The rate of
interest available on a one-year government bond in Canada is 5 per cent. A
similar-risk bond in

Australia yields 7 per cent. The current spot rate of
exchange is C\$1.02/A\$. What will be the one-year forward

rate if the market obeys the interest rate parity
theory?

b Describe the expectation theory of foreign exchange.

2* (Examination
level)
Lozenge plc has taken delivery of 50,000 electronic devices from a Malaysian
company. The

seller is in a strong bargaining position and has
priced the devices in Malaysian dollars at M\$12 each. It has granted

Lozenge three months credit.

The Malaysian interest rate is 3 per cent per
quarter.

Lozenge has all its money tied up in its operations
but could borrow in sterling at 3 per cent per quarter (three

months) if necessary.

A three-month sterling put, Malaysian dollar call
currency option with a strike price of M\$5.425/ for M\$600,000 is

available for a premium of M\$15,000.

Discuss and illustrate three hedging strategies
strategy. Show all calculations.

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