JrHeadcon is hydro-construction firm with a government contract to in JrHeadcon is hydro-construction firm with a govern

JrHeadcon is hydro-construction firm with a government
contract to install salt water purification plants
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IF Practice Questions
Spring 2017
1. JrHeadcon is hydro-construction firm with a government contract
to install salt water
purification plants in a number of Chile’s northern coastal desert
settlements The work is to
be completed in one year at which time the final payment of 25B(
billion) Chilean Pesos
(CLPs) will be wired to JrHeadcon’s NY bank. At the current spot
exchange rate of .
002USDs per CLP, the contract payment would be worth 50M USDs.
The chief financial
officer (CFO) of JrHeadcon calls you, his NY banker, and requests a
one-year forward
exchange rate quote from the bank to sell the CLPs. Before calling the
CFO back, you look up the current interbank lending/borrowing rates
for
CLPs and USDs. The current one-year interbank interest rates are
i(CLP) = 6% and i(USD) =
2%.
A. Design a set of lending/borrowing positions in the interbank
money market that will
generate a risk-free one-year-ahead forward rate quote stated in terms
of USDs per CLP.
Explain why this is a risk-free quote.
B. How much will the USD value of the 25B CLP one-year-ahead
contract payment be if
JrHeadcon accepts the offered forward rate from your bank?
Hint: See the money market hedge setup in Note Set 7. 2. You work
for a bond trader who is thinking of taking uncovered positions in