Question details

Though the real estate market has been depressed in some countries due to the
$ 25.00

 

Though the real estate market has been depressed in some countries due to the aftermath of the global

financial crisis, the markets in some countries or cities have kept their robust growth in prices and

expansions. A noteworthy case is commercial and residential properties in Copenhagen, Denmark.

 

To tap into the above market, you are contemplating a sizeable investment in a commercial property.

You are, however, much concerned with price appreciation in USD, since USD is your functional

currency. The following data on the US and Denmark are made available to you. The currency of

Denmark is Danish Kroner, or Krone, and we use DKK for it below.

 

Spot rate                                  DKK 6.8911/$`

12-month forward rate                         DKK 6.9866/$

Inflation in US                                     2.0 percent/year

Inflation in Denmark               4.4 percent/year

Interest rate in US                    3.2 percent/year

Interest rate in Denmark          5.5 percent/year

 

Based on the above information, answer the following FIVE questions. However, please first follow the

instructions below carefully and throughout for ALL the FIFTEEN questions:

 

• Use the accurate approaches in forecasting in your computations.

• Carry your accuracy to at least four digits beyond the decimal points.

• Do not round the numbers in the internal steps of your computations. If you have to, then

keep at least four digits beyond the decimal points throughout.

• Simply enter your answers in the template. Your internal computations are not required and

no spaces for entering them are provided.

• If you need to enter a loss, indicate it by a negative sign; the template does not recognize

parenthesis.

• Do not convert the amounts into millions or thousands. The template is set to receive the

actual amounts.

• Drop percentage sign (%) and currency symbols like $, DKK, etc., when entering the figures

into the template. The template recognizes only numerical values.

• Finally, please note that a comma (“,”) is not a decimal point.

• In brief, the answers should be only and only numerical, like -123.456 if negative, or 123.456 if

positive.

 

1. Forecast the outright value of DKK for next year on the basis of the relative purchasing power parity.

 

2. Forecast the outright value of DKK for next year on the basis of the international Fisher effect.

 

3. Forecast the outright value of DKK for next year on the basis of the unbiased theory of the forward

rates.

 

4. If instead of entering into the real estate market, you decide to probe into arbitrage opportunities

between the two markets, what is your risk-free profit or loss after one year if you borrow

$4,500,000.00 in the US and transfer it to Denmark today? For simplicity, assume that the interest

rates given above are for borrowing or investing. If you encounter a loss, indicate it by a negative

sign; the template does not recognize parenthesis.

 

5. Based on the information given above, calculate how much the two markets may be in disequilibrium.

Hint: Use the fourth theory (interest rate parity). Express your answer in percent but drop the

percentage sign. If your answer is negative, enter its absolute value, i.e., drop the negative sign when

entering it into the template.

 

6. In preparation for your vacation to the Americas, you withdrew EUR 3,500.00 in Frankfurt for your

emergency expenses only. All other expenses, including day to day expenses, were covered on your

credit cards. You converted this amount in its entirety, or its balances, on four occasions: once in

South Florida into USD upon your arrival, twice in Mexico City (upon your arrival into MXN and

immediately prior to your departure into USD), and finally in South Florida into EUR prior to your

departure to Frankfurt. You were exposed to the following rates. Calculate your final position in

EUR. You had no other transactions on this cash amount except currency conversions. The

conversion fees were zero in all instances.

 

All figures are end of the minute values per USD

 

Currency          Bid                   Ask

EUR                 0.9242                         0.9322

MXN               15.0644           15.1880

 

Consider question 6 again. Provide your currency positions in each of the intermediate currencies in the

other three situations in the following three questions. Your final position is not requested now. Note:

drop currency symbols from your answers.

 

7. Your USD position after arriving and converting currency in South Florida is ________. Drop

currency symbol.

 

8. Your MXN position after arriving and converting currency in Mexico City is ________. Drop

currency symbol

 

9. Your USD position immediately before your departure from Mexico City and after converting

currency is ___________. Drop currency symbol.

 

Using the table in question 6, calculate the bid and ask price of euro in terms of Mexican peso. Note 1:

Your answers should be the amounts of Mexican peso per one euro. Note 2: This question may be

tricky! Note 3: drop currency symbols from your answers.

 

10. The bid price of euro is _________.

 

11. The ask price of euro is _________.

 

12. You are managing thirty or so short-term rental apartments. Your aim is to maximize rental revenue.

Very rarely do you hit the full capacity, except during Christmas holidays. Your leases (rentals) are

often short term and they are calculated on a daily rate basis. Most of the leases are for seven to

fifteen days, though you are open to any length of time beyond a minimum of three days. The rental

elasticity is calculated to be around 1.62, though it does not stay constant. To maximize your revenue

(select only one item and enter 1, 2, …4 in the template):

1. You do not change your rates at all.

2. You increase your daily rates.

3. You lower your daily rates.

4. The use of elasticity is completely irrelevant to rental revenue.

 

13. You borrowed $ 695,000.00 for six months in Miami, converted it immediately into MXN, and

deposited in an interest bearing MXN account. Based on the following rates, calculate the outcome

(loss or profit) of a CIA (covered interest arbitrage) on this amount. If a loss, indicate it by a negative

sign. For simplicity, borrowing and lending rates are assumed to be the same.

_ Spot rate on MXN = MXN 15.06/USD

_ Six-month forward rate on MXN = MXN 15.68/USD

_ Interest rate on USD = 3.2 percent per annum.

_ Interest rate on MXN account = 4.8 percent per annum.

 

14. You bought CLP 3,950,000 (CLP = Chilean pesos) in a non-deliverable forward market (NDF)

exactly six months ago when the spot rate was CLP 604.4/USD and the six month NDF forward ratewas CLP 614.00/USD. Today the spot rate is CLP 631.79/USD and you just settled this purchase.

Calculate the outcome (= profit or loss) of this activity. If a loss, indicate it by a negative sign.

 

15. Spot rate and 75 days forward rates on Turkish Lira (= TRY) are respectively, TRY 2.574/USD and

TRY 2.642/USD. Calculate annual forward premium or discount on this currency from the US

citizen’s perspectives. If negative, use a negative sign.

Available solutions