Assume interest rates in the US are at 1.5% per year, and interest rates in Israel are at 6% per year, and that the shekel is trading at 4 sheckels/dollar. If the two-year forward rate on sheckels is 4.3 sheckels/dollar, do you want to invest in dollars or sheckels to maximize your returns for the next two years? How much would you make in arbitrage profits if you can borrow $10,000,000 or an equivalent amount of sheckels over this time period?
Assume interest rates in the US are at 1.5% per year, and interest rates in Israel are at 6% per year, and that the shekel is trading at 4 sheckels/dollar. If the two-year forward rate on sheckels is 4.3 sheckels/dollar, do you want to invest in dollars or sheckels to maximize your returns for the next two years? How much would you make in arbitrage profits if you can borrow $10,000,000 or an equivalent amount of sheckels over this time period?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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- Assume interest rates in the US are at 1.5% per year, and interest rates in Israel are at 6% per year, and that the shekel is trading at 4 sheckels/dollar.
- If the two-year forward rate on sheckels is 4.3 sheckels/dollar, do you want to invest in dollars or sheckels to maximize your returns for the next two years?
- How much would you make in arbitrage profits if you can borrow $10,000,000 or an equivalent amount of sheckels over this time period?
- What sheckel/dollar forward rate implies no arbitrage?
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The arbitrage profit is the profit that is earned by the use of two market at the same time or different time.
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