A. You want to invest in a riskless project in Sweden. The project has aninitial cost of SKr2.1 million and is expected to produce cash inflowsof SKr810,000 a year for 3 years. The project will be worthless afterthe first 3 years. The expected inflation rate in Sweden is 2 percentwhile it is 5 percent in the U.S. A risk-free security is paying 6percent in the U.S. The current spot rate is $1 = SKr7.55. What is thenet present value of this project in Swedish krona using the foreigncurrency approach? Assume that the international Fisher effect applies. B. In a recent e-news, you observe that the 6-month forward rate is $1.5031/ Euro. Further, if you invest the dollar, it fetches you interest atthe rate of 2% p.a. In comparison, the interest rate in Eurozone is 1%p.a. You also see that CAD 1.5513 are needed to purchase a Euro and CAD1.332 are needed to buy a US$. Is it possible for you to make an arbitrageprofit? If so, which of the arbitrage strategies will you employ andwhat will be the profit? Assume that interest rate parity holds, and youhave one million dollars available to conduct arbitrage.
A. You want to invest in a riskless project in Sweden. The project has an
initial cost of SKr2.1 million and is expected to produce cash inflows
of SKr810,000 a year for 3 years. The project will be worthless after
the first 3 years. The expected inflation rate in Sweden is 2 percent
while it is 5 percent in the U.S. A risk-free security is paying 6
percent in the U.S. The current spot rate is $1 = SKr7.55. What is the
net
currency approach? Assume that the international Fisher effect applies.
B. In a recent e-news, you observe that the 6-month forward rate is $1.5031
/ Euro. Further, if you invest the dollar, it fetches you interest at
the rate of 2% p.a. In comparison, the interest rate in Eurozone is 1%
p.a. You also see that CAD 1.5513 are needed to purchase a Euro and CAD
1.332 are needed to buy a US$. Is it possible for you to make an arbitrage
profit? If so, which of the arbitrage strategies will you employ and
what will be the profit? Assume that interest rate parity holds, and you
have one million dollars available to conduct arbitrage.
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