Homework Answers
Interest rate parity states that the currency with higher interest will depreciate in futures market
Dollar interest is 6%
Pound interest is 4%
Spot rate is 1.5
So dollar shall sell in discount
Arbitrage free futures price = 1.5×1.06/1.04 = 1.5288
Actual futures price is 1.535
Futures are overpriced so covered interest arbitrage exists
Arbitrage process is borrow dollars buy futures market and invest in pound securities
Liability on dollars is 15000000×1.06= 15900000
Pounds we receive is 10000000
Net receipts in dollars 1 year later = 10000000×1.04/1.535 = 15964000
So profit is 15964000-15900000 = 64000 dollars
Option 3 is correct
Add Answer to:
Given the information: Interest rate in US (Rh): Interest rate in UK (Rf): The current spot...
Given the information: Interest rate in US (Rh): 4% Interest rate in UK (RF): 2% Line...
Given the information: Interest rate in US (Rh): 4% Interest rate in UK (RF): 2% Line of credit in US USD 15,000,000 Line of credit in UK GBP 10,000,000 The current spot rate for GBP (SRo: $1.50 Suppose your forecast tells you that the spot rate of GBP one year later (SR2) will be $1.52. Then, based on your estimated uncovered rates (Ruh & Ruf), you should borrow in and invest in GBP: USD USD: GBP
Currently the spot exchange rate is $1.558 per pound (USD/GBP). The interest rate in the UK...
Currently the spot exchange rate is $1.558 per pound (USD/GBP). The interest rate in the UK is 6%. The one-year forward exchange rate is $1.5200/GBP. If interest rate parity holds, what must be the US interest rate for the same period?
2) The spot USD /GBP rate is 1.1505. The1 year t-bill rate in the US is...
2) The spot USD /GBP rate is 1.1505. The1 year t-bill rate in the US is .9335%. The 1 year rate in the UK is 0.7969%. a) Calculate the 1 year USD/GBP 1 year forward rate. b) If the observed 1 year forward rate is 1.35 USD/GBP, is there an arbitrage opportunity? How would you take advantage of this? Show all your transactions and steps.
1) Assume the interest rate is 4% in the UK and 8% in Australia. The forward...
1) Assume the interest rate is 4% in the UK and 8% in Australia. The forward GBP/AUD is 187 AUD. Compute the spot GBP/AUD that makes the IRP hold. Show your work . 2) The spot EUR/USD is 1.12 and the forward rate is 1.1. The interest rate in France is 3% and 4% in the US. a) Does the iRP hold? b) If not, how could you make a CIA profit by using 1000 EUR? Show your work. c)...
The US 1-year interest rate is 5% per year and the 1-year UK interest rate is...
The US 1-year interest rate is 5% per year and the 1-year UK interest rate is 3%. The spot rate is $1.55/pound and the 1-year forward rate is $1.60/pound. The optimal strategy is for an investor to borrow pounds because the pound is at a forward premium The optimal strategy is for an investor to borrow dollars Interest Rate Parity holds, so there is no advantage to borrowing dollars or pounds The optimal strategy is to borrow pounds because UK...
investors in both the US and the UK require the same real interest rate, 3% on...
investors in both the US and the UK require the same real interest rate, 3% on their lending. there is a consensus in the capital market that the annual inflation rate is likely to be 2% in the US and 1.5% in the UK for the next three years. the spot exchange rate is currently 1.50 using panity conditions, what is the most likely forward dollar-pound exchange rate for one-year maturity?
investors in both the US and the UK require the same real interest rate, 3% on their lending. there is a consensus in th...
investors in both the US and the UK require the same real interest rate, 3% on their lending. there is a consensus in the capital market that the annual inflation rate is likely to be 2% in the US and 1.5% in the UK for the next three years. the spot exchange rate is currently 1.50 using panity conditions, what is the most likely forward dollar-pound exchange rate for one-year maturity?
5A. Suppose the current spot rate for the UK pound is $1.9586/£. The annual inflation rates...
5A. Suppose the current spot rate for the UK pound is $1.9586/£. The annual inflation rates in the US and in the UK are expected to be 2% and 5%, respectively. This means that: a. The U.S. dollar should appreciate over the next year. b. The U.S. dollar should depreciate over the next year. c. Both a and b are true. d. Neither a nor b are true. 5B. Using the information provided in question 5A, what is your best...
Interest Rate Parity If your home country is the U.S. and based on the following information,...
Interest Rate Parity If your home country is the U.S. and based on the following information, should you invest in Mexico? Forward MXN/USD 0.0479 Time (months) 3 rh 2.00% 3.00% Spot MXN/USD 0.0478 rt Yes, because the rf is 3% which is higher than the 2% in the U.S. Yes, because your annual return would be 3.84% No, because you would lose 1.84% in annual returns No, because the implied rate is higher than the forward rate.
QUESTION 1: Suppose that the current spot exchange rate is GBP1= €1.50 and the one-year forward...
QUESTION 1: Suppose that the current spot exchange rate is GBP1= €1.50 and the one-year forward exchange rate is GBP1=€1.60. One-year interest rate is 5.4% in euros and 5.2% in pounds. If you have EUR1,000,000, what is the Covered Interest arbitrage profit in EUR? QUESTION 2: Suppose that the current spot exchange rate is GBP1= €1.50 and the one-year forward exchange rate is GBP1=€1.60. One-year interest rate is 5.4% in euros and 5.2% in pounds. If you conduct covered interest...
Given the information: Interest rate in US (Rh): 4% Interest rate in UK (RF): 2% Line of credit in US USD 15,000,000 Line of credit in UK GBP 10,000,000 The current spot rate for GBP (SRo: $1.50 Suppose your forecast tells you that the spot rate of GBP one year later (SR2) will be $1.52. Then, based on your estimated uncovered rates (Ruh & Ruf), you should borrow in and invest in GBP: USD USD: GBP
2) The spot USD /GBP rate is 1.1505. The1 year t-bill rate in the US is .9335%. The 1 year rate in the UK is 0.7969%. a) Calculate the 1 year USD/GBP 1 year forward rate. b) If the observed 1 year forward rate is 1.35 USD/GBP, is there an arbitrage opportunity? How would you take advantage of this? Show all your transactions and steps.
5A. Suppose the current spot rate for the UK pound is $1.9586/£. The annual inflation rates in the US and in the UK are expected to be 2% and 5%, respectively. This means that: a. The U.S. dollar should appreciate over the next year. b. The U.S. dollar should depreciate over the next year. c. Both a and b are true. d. Neither a nor b are true. 5B. Using the information provided in question 5A, what is your best...
Interest Rate Parity If your home country is the U.S. and based on the following information, should you invest in Mexico? Forward MXN/USD 0.0479 Time (months) 3 rh 2.00% 3.00% Spot MXN/USD 0.0478 rt Yes, because the rf is 3% which is higher than the 2% in the U.S. Yes, because your annual return would be 3.84% No, because you would lose 1.84% in annual returns No, because the implied rate is higher than the forward rate.
Most questions answered within 3 hours.
-
The price of 1 lb of potatoes is $1.75. If all the potatoes sold
today at...
asked 36 minutes ago -
Garcia Company issues 20.00%, 15-year bonds with a par value of
$470,000 and semiannual interest payments....
asked 34 minutes ago -
In C++ Programming, Try using loops only.
This lab demonstrates the use of the While Loop...
asked 1 hour ago -
Effect of DCMU and sodium azide on Chlamydomonas? We did an
experiment where we had Chlamydomonas...
asked 2 hours ago -
1a) According to the ideal gas law, _______________.
a. a gas has infinite volume at absolute...
asked 3 hours ago -
Oakdale Fashions, Inc. had $245,000 in 2018 taxable income.
Using the tax schedule in Table 2.3...
asked 3 hours ago -
The marketing class at CSUS had an average score of 150. An
educational analyst determined that...
asked 5 hours ago -
Justin Case has purchased a $250 000 home by putting 20 % down
and taking out...
asked 5 hours ago -
1. In a labor market, marginal cost for a firm is
____________.
a. recruiting cost
b....
asked 5 hours ago -
On January 1, 2019, ABC Company issued $60,000,000 of 20-year,
10.5% bonds when the market rate...
asked 6 hours ago -
39.4% of US homes continue to use a landline in addition to cell
phone service. 3...
asked 7 hours ago -
Starting with benzene, synthesize 1-phenyl-1-butyne.
Show intermediates and reagents.
asked 7 hours ago