= A Polish currency dealer has good credit and can borrow either €1,600,000 or $2,000,000 for one year. The = 2%. The spot one-year interest rate in the U.S. is is 6% and in the euro zone the one-year interest rate is i exchange rate is $1.20 = €1.00 and the one-year forward exchange rate is $1.25 = €1.00. Show how you can realize a certain euro profit via covered interest arbitrage. Answer:
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- A currency dealer has good credit and can borrow either $1,000,000 or €800,000 for one year. The one-year interest rate in the U.S. is i$= 3.5% and in the euro zone the one-year interest rate is i€ = 6.5%. The spot exchange rate is $1.25 = €1.00 and the one-year forward exchange rate is $1.20 - €1.00. Show how to realize a certain profit via covered interest arbitrage. O Borrow $1,000,000 at 3.5%. Trade $1,000,000 for €800,000; invest at i€ - 6.5%; translate proceeds back at forward rate of $1.20 - €1.00, gross proceeds - $1,022,400. Both B) and C) Ⓒ Borrow €800,000 at i€ = 6%; translate to dollars at the spot, invest in the U.S. at i$ = 3.5% for one year; translate $1,035,000 back into euro at the forward rate of $1.20 - €1.00. Net profit €10,500. Borrow €800,000 at i€ - 6.5% ; translate to dollars at the spot, invest in the U.S. at i$ - 3.5 % for one year; translate €852,000 back into dollars at the forward rate of $1.20 €1.00. Net profit $12,600.A currency dealer has good credit and can borrow either $1,000,000 or €800,000 for one year. The one-year inflation rate in the U.S. is r$ = 2.5% and in the euro zone the one-year inflation rate is л€ = 5.5%. The one-year forward exchange rate is $1.20 = €1.00; what must the spot rate be to eliminate arbitrage opportunities? O $1.2471- €1.00 O $1.1547 €1.00 $1.0200 €1.00 O $1.2351 - €1.00K1. A Polish currency dealer has good credit and can borrow either €1,600,000 or $2,000,000 for one year. The one-year interest rate in the U.S. is i$ = 6% and in the euro zone the one-year interest rate is i€ = 2%. The spot exchange rate is $1.20 = €1.00 and the one-year forward exchange rate is $1.25 = €1.00. Show how you can realize a certain euro profit via covered interest arbitrage. Group of answer choices Borrow $2,000,000 at 6%; trade $2,000,000 for €1,666,667 at the spot rate; invest euros at i€ = 2%; translate euro proceeds back to dollars at the forward rate of $1.25 = €1.00 for gross proceeds of $2,125,000. Net profit will be $5,000. Borrow $2,000,000 at 6%; trade $2,000,000 for €800,000 at the spot rate; invest euros at i€ = 2%; translate euro proceeds back to dollars at the forward rate of $1.20 = €1.00. Net profit will be $17,600. Borrow €1,600,000 at i€ = 2%; translate euros to dollars at the spot rate, invest dollars in the U.S. at i$ = 6% for one year;…
- Assume that a bank has assets located in Germany worth €390 million earning an average of 6 percent. It also holds €190 in liabilities and pays an average of 4 percent per year. The current spot rate is €1.50 for $1. If the exchange rate at the end of the year is €2.00 for $1: a. What happened to the dollar? Did it appreciate or depreciate against the euro (€)?b. What is the effect of the exchange rate change on the net interest margin (interest received minus interest paid) in dollars from its foreign assets and liabilities?c. What is the effect of the exchange rate change on the value of the assets and liabilities in dollars?Suppose that the current spot exchange rate is €0.80/$ and the three-month forward exchange rate is €0.7813/$. The three-month interest rate is 5.60% per annum in the United States and 5.40% per annum in France. Assume that you can borrow $1,000,000. How much can you realize via covered interest arbitrage? €10,800. $23,758. €37,757. $7,813. $37,757. $14,000.Suppose that the current EUR/GBP rate is 0.6674 and the one-year forward exchange rate is 0.6748. The one-year interest rate is 1.4% in euros and 3.4% in pounds. You can borrow at most €1,000,000 or the equivalent pound amount. Suppose you are a Euro-based investor. Determine the profit/loss (in EUR, no cents) if you borrow locally and invest in pounds
- Currently, the GBP/USD rate is 1.5011 and the six-month forward exchange rate is 1.5261. The six-month interest rate is 7.6% per annum in the U.S. and 5.7% per annum in the U.K. Assume that you can borrow £1,000,000 or its equivalent in USD. How much do you make/lose if you borrow the foreign currency and invest locally? (USD, no cents)A currency dealer can borrow $1,110,000 (or the equivalent in euros) for one year. The one-year interest rate is 2.90% in the U.S. and 6.20% in the euro zone. The spot exchange rate is $1.3993/€1.00 and the one-year forward exchange rate is $1.3368/€1.00. What arbitrage profit results if the trader borrows the maximum available funds? €62,635.70 OR $83,731.40 €36,630.00 OR $48,966.98 €18,585.78 OR $24,845.47 €78,920.98 OR $105,501.57 €11,985.50 OR $16,022.22 €16,022.22 OR $21,418.50Assume that a bank has assets located in Germany worth €150 million earning an average of 8 percent. It also holds €100 in liabilities and pays an average of 6 percent per year. The current spot rate is €1.50 for $1. If the exchange rate at the end of the year is €2.00 for $1, ( LG 19-1) a. What happened to the dollar? Did it appreciate or depreciate against the euro (€)? b. What is the effect of the exchange rate change on the net interest margin (interest received minus interest paid) in dollars from its foreign assets and liabilities? c. What is the effect of the exchange rate change on the value of the assets and liabilities in dollars?
- Suppose that the current EUR/GBP rate is 0.6668 and the one-year forward exchange rate is 0.6742. The one-year interest rate is 1.8% in euros and 3.6% in pounds. You can borrow at most €1,000,000 or the equivalent pound amount. Suppose you are a pound-based investor. Determine the profit/loss (in GBP, no cents) if you borrow locally and invest in Euros.Currently, the USD/MXN rate is 19.7800 and the six-month forward exchange rate is 20.1700. The six-month interest rate is 4.9% per annum in the U.S. and 6.2% per annum in Mexico. Assume that you can borrow MXP10,000,000 or its equivalent in USD. How much do you make/lose if you borrow the foreign currency and invest locally? (USD, no cents)Suppose that the current spot exchange rate is €0.80/$ and the three-month forward exchange rate is €0.7813/$. The three-month interest rate is 5.60 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 €800,000. a. 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. b. Assume that you want to realize profit in terms of euros. Show the covered arbitrage process and determine the arbitrage profit in euros. 2. ATech has fixed costs of $7 million and profits of $4 million. Its competitor, ZTech, is roughly the same size and this year earned the same profits, $4 million. But it operates with fixed costs of $5 million and lower variable costs. a. Which firm has higher operating leverage? Hint: Use Degree of Operating Leverage (DOL), b. Which firm will likely have higher profits if the…
