Financial accounting If a country can give up one unit of futureconsumption and as a result increase its currentconsumption by 0.85 units, its real rate of interestmust be:

Image.Explanation.The real interest rate represents the rate at which present consumption can be…

Answered: If a country can give up one unit of…

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter9: Forecasting Exchange Rates

Section: Chapter Questions

Problem 5ST

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Based on the history of interest rates, what is the range of short-term rates that has occurred in the United States? The range of long-term rates? What is a typical value for each?
(c) If the one-year interest rate on a dollar denominated Treasury bill is 4.5% p.a. and that on a similar Euro-denominated security is 7.5% p.a. and the current spot rate is USD 1.08/EUR, what forward exchange rate will prevent covered interest arbitrage?
What must be real rate of interest?
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Assume that spot rate of New Zealand dollar is AUD 0.64/NZD, the 1-year forward rate of New Zealand dollar is AUD 0.62/NZD, 1-year interest rate on NZD is 9% and 1-year interest rate on AUD is 6%. If there is a possible arbitrage opportunity, the appropriate arbitrage strategy should be and the rate of return from covered interest arbitrage would be arbitrage; %. Select one: a. Inward; 0.38 b. Outward; 9.42 c. Inward; 9.42 d. Outward; 0.38
Q1. (a) What effect does compounding interest more frequently than annually have on: (i) future value and (ii) the effective annual rate (EAR)? Why? Differentiate between a nominal annual rate and an effective annual rate (EAR).
Required:a. Calculate the dollar proceeds from the FI’s loan portfolio at the end of the year, the return on the FI’s loan portfolio, and the net return for the FI if the pound spot foreign exchange rate falls to $1.20/£1 and the lira spot foreign exchange rate falls to $0.156/TL1 over the year.b. Calculate the dollar proceeds from the FI’s loan portfolio at the end of the year, the return on the FI’s loan portfolio, and the net return for the FI if the pound spot foreign exchange rate rises to $1.40/£1 and the lira spot foreign exchange rate rises to $0.17/TL1 over the year.c. Suppose that the FI funds the $250 million U.S. loans with $250 million one-year U.S. CD at a rate of 4 percent; funds $150 equivalent British loans with $150 million equivalent one-year pound CDs at a rate of 5 percent; funds $100 million equivalent Turkish loans with $100 million equivalent one-year Turkish lira CDs at a rate of 6 percent. Assume no other changes. What will the FI’s balance sheet look like…
Currently, you canexchange 1 euro for 1.25 dollars in the 180-dayforward market, and the risk-free rate on 180-daysecurities is 6% in the United States and 4% inFrance. Does interest rate parity hold? If not, whichsecurities offer the highest expected return?
An exchange rate is 0.7000 and the six‐month domestic and foreign risk‐free interest rates are 5% and 7% (both expressed with continuous compounding). What is the six‐month forward rate? a) 0.7070 b) 0.7177 c) 0.7249 d) 0.6930

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If a country can give up one unit of future consumption and as a result increase its current consumption by 0.85 units, its real rate of interest must be: