1) You are given the following information: ● r = 1.0% ● ● The current interest rate on a 1 year loan to the U.S. government = 3.0% The MRP on 10 year bonds = 0.75% The LP on U.S. and Zeniba Inc. bonds=0 The interest rate on a 10 year loan to Zeniba Inc. is 1.5 times the rate on a 10 year loan to the U.S. government a) What is the inflation rate expected to be over the next year? b) Suppose the average annual inflation rate expected each year over the next 10 years is the same as the inflation rate expected over the next year. What should be the current interest rate on a 10 year loan to the U.S. government? c) What is the DRP on a 10 year loan to Zeniba Inc.?

1) You are given the following information: ● r = 1.0% ● ● The current interest rate on a 1 year loan to the U.S. government = 3.0% The MRP on 10 year bonds = 0.75% The LP on U.S. and Zeniba Inc. bonds=0 The interest rate on a 10 year loan to Zeniba Inc. is 1.5 times the rate on a 10 year loan to the U.S. government a) What is the inflation rate expected to be over the next year? b) Suppose the average annual inflation rate expected each year over the next 10 years is the same as the inflation rate expected over the next year. What should be the current interest rate on a 10 year loan to the U.S. government? c) What is the DRP on a 10 year loan to Zeniba Inc.?

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter20: Short-term Financing

Section: Chapter Questions

Problem 4ST

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Assume the spot rate between the uk and the US is .€ .6789= $1 while the one year Foward rate is €.6782=$1. The risk free rate in the UK is 3.1 percent. The risk free rate in the U.S is 2.9 percent. How much profit can you earn for the year on a loan of $1,500 by utilizing covered interest abitrage?
1. Assume you notice the following information. Assume you spend $1 million USD to create an arbitrage trading strategy. What is your profit is USD. Remember to consider the profit after you pay back your loan Spot (CAD/USD)=1.75 • 1 Year Forward (CAD/USD) = 1.65 • 1 Year Canadian interest rate of 3% in Canadian Dollars (CAD) • 1 Year US interest rate of 4% in US Dollars (USD) 592,484.85
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Suppose that the annual interest rates on 6-months borrowing in Romania and the United States are 12.7 % and 0.8 %, respectively. The current spot rate RON/US$ is 4.00 and 6-months forward rate RON/US$ is 4.21. Does interest rate parity hold? Would it be as a result of covered or uncovered interest arbitrage, why? Determine arbitrage potential in b) using spot rate after six months of RON/US $= 4.25 rather than 6-months forward rate.
suppose you purchased a 10 million one-year Australian dollar loan that pays 7 percent interest annually. The spot rate of U.S. dollars for Australian dollars (AUD/USD) is $0.820/A$1. What is par value of the loan in U.S. dollars?
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