During the 2010 European crisis, Italy faced 6% borrowing rate. Assume that, if it defaults, Italy's debt would be written off but output would be 20% lower. (1) What's the cutoff level of debt burden above which Italy defaults? (2) Assume that the risk free rate in the world is 2%, what's the implied default probability for Italy if its borrowing rate is 6%?

During the 2010 European crisis, Italy faced 6% borrowing rate. Assume that, if it defaults, Italy's debt would be written off but output would be 20% lower. (1) What's the cutoff level of debt burden above which Italy defaults? (2) Assume that the risk free rate in the world is 2%, what's the implied default probability for Italy if its borrowing rate is 6%?

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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Today, $1 = 1.82 Euro and $1 = 130 Korean Won. In the 90-day forward market, $1 = 1.84 Euro and $1 = 127 Korean Won. Which of the following statements is most correct when interest rate parity holds? Interest rates on 90-day risk-free U.S. securities are higher than the interest rates on 90-day risk-free Euro securities. Since interest rate parity holds, interest rates should be the same in all three countries. Interest rates on 90-day risk-free U.S. securities are higher than the interest rates on 90-day risk-free Korean securities. Interest rates on 90-day risk-free U.S. securities equal the interest rates on 90-day risk-free Korean securities.
D6) If the foreign interest rate is 4%, the risk premium on domestic assets, ρ, is 18%, and the expected rate of depreciation of the domestic currency against the foreign currency is 3%, what is the domestic interest rate in percentage terms, given covered interest parity holds? [All variables have a 1-year time frame.]
The International Monetary Fund, the IMF, has forecasted that the global economy is likely to experience a contraction of 3% in 2020, due to the ravages of the COVID-19 pandemic on both developing and advanced economies. Investors believe that The Deutsche Bundesbank, the central bank of the Federal Republic of Germany, will employ direct foreign intervention strategies in the future, to minimize the economic fallout and increase the volume of exports. Assume the following information: 1 - year U.S. interest rate = 3% 1- year German interest rate = 6% Spot rate of euro = $1.09 Draw a diagram to illustrate your understanding of the relationship between interest rate parity and covered interest rate arbitrage and the interplay of market forces that will occur to eliminate arbitrage opportunities.
Which of the following is an example of a firm-specific risk? The Federal Reserve decreases the federal funds rate U.S. government announces an increase in corporate tax rate Bond investor invests in a Japanese investment grade bond and receives coupon payments in Japanese yens Bond investor learns from the news that the inflation rate is expected to increase next year
Suppose that the invester of GMO has an extra cash reserveof $700,000 to invest. The interest rate is 1.49% per year in the United States and 6.47% per year in Mexico. Currently, the spotexchange rate is 19.780 Pesos per dollar and the one-year forwardrate is €19.790 per dollar. The investor does not wishto bear any exchange risk. Assess how he can construct an arbitrage portfolio based on your calculation.
Suppose the year 1, year 2 and year 3 forecasts for the rate of inflation in Denmark are 3%, 4% and 5% respectively. Suppose also that the year 1, year 2 and year 3 forecasts for the rate of inflation in France are 11%, 9% and 8% respectively. If the expected spot rate between the Danish Krone (DKK) and the EUR is EUR0.1344/DKK at the end of year 3, what is the current spot rate? a. EUR0.119024/DKK b. EUR0.151762/DKK c. EUR0.128269/DKK d. EUR0.111027/DKK e. Not enough information to answer this question.
6. If the U.S. runs a current account deficit next year, which of the following are necessarily true: A) U.S. will have to run a government budget deficit B) The Central Bank of China will have to buy U.S. treasury bonds C) The U.S. will import more goods and services than it exports D) U.S. national saving will be less than U.S. national investment
The International Monetary Fund, the IMF, has forecasted that the global economy is likely to experience a contraction of 3% in 2020, due to the ravages of the COVID-19 pandemic on both developing and advanced economies. Investors believe that The Deutsche Bundesbank, the central bank of the Federal Republic of Germany, will employ direct foreign intervention strategies in the future, to minimize the economic fallout and increase the volume of exports. Assume the following information: 1 - year U.S. interest rate = 3% 1- year German interest rate = 6% Spot rate of euro = $1.09 Compute the profit and yield to the investor who stands to benefit from covered interest arbitrage.
The U.S. risk-free rate is 2.1% and the expected inflation rate is 6.2%. If the expected inflation rate in Vietnam is 9.6%, what is the implied risk-free rate in Vietnam? Between 2% and 4% Between 4% and 6% Between 6% and 10% None of the above
Suppose the spot price of the British pound is currently $1.50. If the risk-free interest rate on one-year government bonds is 4% in the United States and 3% in the United Kingdom, what must the forward price of the pound be for delivery one year from now? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
The spot rate on the pound is $1.80 and the 180-day forward rate is $1.84. The difference between the two rates means that we know for sure that (assume that IRP and FEP hold):a) nominal interest rates are higher in Britain relative to the USb) nominal interest rates are lower in Britain relative to the USc) you will have more wealth by investing in Britaind) you will have more wealth by investing in the USe) a and cf) b and d
4. Suppose, the INR65.4015/USD in the FX Market. The selling price of the basic SONY LED TV is USD 75 in US, while in India the same TV is sold for 5,300 INR. What should be the forward rate USD/INR to valid the PPP? If the PPP is not valid what are the necessary steps to get the equilibrium in US and Indian markets?

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