2 Suppose that the current spot exchange rate is €0.8250/S and the three-month forward exchange rate is €0.8132/5. The three-month interest rate is 5.80 percent per annum in the United States and 5.40 percent per annum in France. Assume that you can borrow up to $1,000,000 or €825,000 Show how to realize a certain profit via covered interest arbitrage, assuming that you want to realize profit in terms of U.S. dollars. Also determine the size of your arbitrage profit

2 Suppose that the current spot exchange rate is €0.8250/S and the three-month forward exchange rate is €0.8132/5. The three-month interest rate is 5.80 percent per annum in the United States and 5.40 percent per annum in France. Assume that you can borrow up to $1,000,000 or €825,000 Show how to realize a certain profit via covered interest arbitrage, assuming that you want to realize profit in terms of U.S. dollars. Also determine the size of your arbitrage profit

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose the average interest rate on euro bonds is 4% and the average interest rate on U.S. dollar bonds is 6%. Which should the investor choose? The euro bond, because European economies are usually more stable Neither, because bonds have high default rates in both countries. Both, because an investor will choose some euro bonds and some U.S. bonds to diversify O It is not possible to answer without information on exchange rates.
Assume that you buy a 1-year, 168,000-peso Philippine bond that pays 9 percent when the exchange rate is 1 Canadian dollar for 42 pesos. If, after one year, the peso falls to 1 Canadian dollar equals 45 pesos, how much have you gained or lost in Canadian dollars? Round your answer to the nearest dollar amount. loss * $ 4353
Suppose you & classmates are marketing team assembled by your Brazil based firm To estimate demand in the U.S. market for its newly developed product. The market Research firm you hired requires $150,000 to perform a thorough study. But your Group is informed that total research budget for the year is 3 million Brazilian real & That no more than 20% of the budget can be spent on any one project. 16 points a. If the current exchange rate is 5 real/$, will you have the market study Conducted? Why or why not? (show your calculations) b. If the current exchange rate is 3 real/$, will you have the market study Conducted? Why or why not? (show your calculations) c. At what exchange rate your decision from rejecting the proposed research project to accept the Project?
Purchasing-power parity (PPP) theory states that exchange rates would need to equalize the prices of goods in any two countries. For the dollar price Activity Frame o be the same in both countries, a U.S. citizen would need to be able to convert $5.74 into exactly GBP 3.29. To find the exchange rate at which hamburger purchasing power is the same in both countries, divide the price in the United States by the price in the United Kingdom: PPP Exchange Rate (U.S. Dollars per British pound) = $5.74 GBP 3.29 = $1.74 per pound The exchange rate that would have equalized the dollar price of a Big Mac in the United States and the Euro area (that is, the PPP exchange rate for Big Macs) is . This change would mean that the euro had against the dollar. If Big Macs were a durable good that could be costlessly transported between countries, which of the following would present an arbitrage opportunity? Check all that apply. Exporting Big Macs from the Euro area to the United States Exporting Big…
Suppose you observe the following exchange rates and interest rates for the USD and JPY: Bid Ask USD/JPY 105.20 105.95 USD,JPY F,360 104.25 105.10 Trader lends at Trader borrows at I USD ? ? I JPY 1.40% 1.50% Which answer is closest to the maximum US lending rate that prevents covered interest rate arbitrage? 3.21% 3.16% 3.05% 2.32% 2.42%
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33 The law of volatility states that similar goods or commodities in different countries should remain at the same price after conversion of currencies according to current exchange rates. True or False True False
If a dollar can buy 98 Japanese yen and a British pound costs $1.50, how many yen would it take to buy £1? If a pound of copper costs £1 in Britain, ¥1,600 per pound in Tokyo, and $1.45 per pound in the United States, where is a pound of copper most expensive and where is it least expensive?
9. The relationships between demand and supply of the Olympios Dollar and the exchange rate with the Terranian Credit are given by the following functions: E = 8.75 -0.03Ds E = 0.02Ss- 3.50 where: E = Exchange rate: = price of Olympios dollar (Terranian credits / Olympios dollars) index of demand for Olympios dollar Ss = index of supply of Olympios dollar. Ds a) i) Determine the exchange rate that would prevail under a clean float. ii) Explain what this exchange rate would mean for the balance of payments of Olympios. b) The government of Olympios elects instead to fix the exchange rate with the Terranian credit at E=1.5 credits per dollar. i) Describe what actions the central bank will need to take in the short run to maintain this exchange rate, and the state of the balance of payments. ii) Explain what measures would be required if the government wishes to maintain this exchange rate in the long run.
8. Why exchange rates matter Suppose that you go on vacation to Canada every summer. Last year, the hotel room where you stayed cost C$100 per night, and it costs the same this year. The exchange rate was 1.04 US$/C$ last year, and it is 0.95 US$/C$ this year. This means you will pay per night this year than you paid last year. The U.S. dollar-Canadian dollar exchange rate is essentially the price of a Canadian dollar in terms of U.S. dollars. When this price falls, the Canadian dollar is said to depreciate against the U.S. dollar. Thus, from your analysis, you can conclude that when the Canadian dollar depreciates against the U.S. dollar, Canadian goods and services become expensive for Americans. DeutschAuto is a German automaker that pays most of its production costs in euros. Suppose that in 2007, DeutschAuto's cost of producing a car was €23,000 and that the company sold a car in the United States for $36,000. Further, suppose that the dollar-euro exchange rate rose from 1.35$/ €…
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Problem 5 Swissie Triangular ArbitrageThe following exchange rates are available to you. (You can buy or sell at the stated rates.)1.Mt. Fuji Bank2.Mt. Rushmore Bank3. Mt Blanc Bank1.¥92.00/S2.SF1.02/S3.¥90.00/SFAssume you have an initial SF12,000,000. Can you make a profit via triangular arbitrage?If so, show the steps and calculate the amount of profit in Swiss francs (Swissies).