A currency dealer has good credit and can borrow either $1,000,000 or €800,000 for one year. Theone-year interest rate in the U.S. is i$= 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 atforward 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.

Arbitrage is risk free opportunity available in market due to incorrect pricing in two markets.

currency dealer has good credit and can borrow either $1,000,000 or €800,000 for one year. ne-year interest rate in the U.S. is i$ = 3.5% and in the euro zone the one-year interest rate is 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. Borrow $1,000,000 at 3.5%. Trade $1,000,000 for €800,000; invest at i€ - 6.5% ; translate proceeds back forward rate of $1.20 - €1.00, gross proceeds - $1,022,400.

currency dealer has good credit and can borrow either $1,000,000 or €800,000 for one year. ne-year interest rate in the U.S. is i$ = 3.5% and in the euro zone the one-year interest rate is 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. Borrow $1,000,000 at 3.5%. Trade $1,000,000 for €800,000; invest at i€ - 6.5% ; translate proceeds back forward rate of $1.20 - €1.00, gross proceeds - $1,022,400.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter22: International Financial Management

Section: Chapter Questions

Problem 8P

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A currency dealer has good credit and can borrow either $1,000,000 or €800,000 for one year. The one-year inflation rate in the U.S. is r$ = 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 - €1.00
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)
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Currently, the spot exchange rate is $1.56 per £ and the three-month forward exchange rate is $1.58 per £. The three-month interest rate is 8.0% per annum in the U.S. and 5.8% per annum in the U.K. Assume that you can borrow as much as $1,560,000 or £1,000,000. Required: Determine whether the interest rate parity is currently holding. If the IRP is not holding, how would you carry out covered interest arbitrage? What will be your arbitrage profit? Explain how the IRP will be restored as a result of covered arbitrage activities.
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K1. 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;…
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Suppose that the current spot exchange rate is €1.72 per £ and the one-year forward exchange rate is €1.80 per £. The one-year interest rate is 5.4% in euros and 5.2% in pounds. You can borrow at most €1,000,000 or the equivalent pound amount, i.e., £581,395, at the current spot exchange rate. Required: a. If you are a euro-based investor, how can you realize a guaranteed profit from covered interest arbitrage and the size of arbitrage profit? b. How will the interest rate parity be restored as a result of the above transactions? c. If you are a pound-based investor, what is the covered arbitrage process and the size of the arbitrage profit? Complete this question by entering your answers in the tabs below. Required A Required B Required C If you are a euro-based investor, how can you realize a guaranteed profit from covered interest arbitrage and the size of arbitrage profit? Note: Do not round intermediate calculations. Round off the final answer to nearest whole dollar. Profit from…
Currently, the spot exchange rate is CHF 0.89/$ and the three-month forward exchange rate is CHF 0.86/$. The three-month interest rate is 5.6% per annum in the U.S. and 4.0% per annum in Switzerland. Assume that you can borrow as much as $1,120,000 or CHF 1,000,000. Determine whether the interest rate parity is currently holding. If the IRP is not holding, how would you carry out covered interest arbitrage? Show all the steps and determine the arbitrage profit. Explain how the IRP will be restored as a result of covered arbitrage activities.
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