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 arbitrage using EUR
25,000,000, which of the following will happen in the
market?
A. EUR will depreciate in spot market | |
B. GBP will appreciate in forward market | |
C. Interest rate in EUR will decrease | |
D. Interest rate in GBP will increase | |
E. None of the above is correct |
QUESTION 3:
You have following information:
Spot exchange rate: CAD1=USD0.80
1-year forward rate : CAD1=USD0.79
1-year Canadian interest rate 4%
1-year U.S. interest rate 2.5%
What is the rate of return (in percent) for covered
interest arbitrage.
QUESTION 4:
You have following information:
Spot exchange rate: CAD1=USD0.80
1-year forward rate : CAD1=USD0.79
1-year Canadian interest rate 4%
1-year U.S. interest rate 2.5%
When you conduct Covered Interest Arbitrage, which of the
following is correct
A. CAD will depreciate in forward market | |
B. Interest rate in US will drop | |
C. Interest rate in Canada will increase | |
D. CAD will depreciate in spot market |
QUESTION 5:
Spot rate is: USD1 = HKD7.5000
1-year Forward rate is: USD1 = HKD7.6875
What is the forward rate premium/discount for
USD?
QUESTION 6:
Spot rate is: USD1 = HKD7.5000
1-year Forward rate is: USD1 = HKD7.6875
What is the forward rate premium/discount for HKD?
____percent (dont include % sign)
(QUESTION 1)
Here, if covered interest arbitrage relationship holds,
1 + Euro-zone interest rate = (Forward rate / Spot rate) x (1 + British interest rate)
1 + 0.054 = (1.6 / 1.5) x (1 + 0.052)
1.054 = 1.0667 x 1.052
1.054 = 1.1221
Since left-hand side is lower than right-hand side, it means that forward GBP is overvalued. So, investor will borrow Euro.
Therefore, 1,000,000 euros are borrowed at 5.4%.
After 1 year, (Amount + Principal) of this borrowing in Euro = 1,000,000 x 1.054 = 1,054,000
Using this, GBP purchased = 1,000,000 / 1.5 = 666,667
When GBP 666,667 is invested at 5.2%, Amount received after 1 year = 666,667 x 1.052 = GBP 701,333.68
After 1 year, GBP 701,333.68 is sold (using exchange rate of 1.6) for (701,333.68 x 1.6) = Euro 1,122,133.89
Arbitrage profit = (1,122,133.89 - 1,054,000) euro = 68,133.89 euro
NOTE: As per Chegg Answering Policy, 1st question has been answered.
QUESTION 1: Suppose that the current spot exchange rate is GBP1= €1.50 and the one-year forward...
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