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Ed Smith is a new trainee in the foreign exchange (FX) services department of a major global bank. Smiths focus is to assist senior FX trader, Feliz Mehmet, CFA. Mehmet mentions that an Indian corporate client exporting to the United Kingdom wants to estimate the potential hedging cost for a sale closing in one year. Smith is to determine the premium/discount for an annual (360 day) forward contract using the exchange rate data presented in Exhibit 1. Exhibit 1 Select Currency Data for GBP and INR Spot (INR/GBP) 79.5093 Annual (360-day) Libor (GBP) 5.43% Annual (360-day) Libor (INR) 7.52% Mehmet is also looking at two possible trades to determine their profit potential. The first trade involves a possible triangular arbitrage trade using the Swiss, US and Brazilian currencies, to be executed based on a dealers bid/offer rate quote of 0.5161/0.5163 in CHF/BRL and the interbank spot rate quotes presented in Exhibit 2. Exhibit 2 Interbank Market Quotes Currency Pair Bid/Offer CHF/USD 0.9099/0.9101 BRL/USD 1.7790/1.7792 Mehmet is also considering a carry trade involving the USD and the Euro. He anticipates it will generate a higher return than buying a one-year domestic note at the current market quote due to low US interest rates and his predictions of exchange rates in one year. To help Mehmet assess the carry trade, Smith provides Mehmet with selected current market data and his one year forecasts in Exhibit 3.

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