If the current exchange rate is $1.95/£, the 1-year forward exchange rate is $2.05/£, and the interest rate on British government bills is 7% per year, what risk-free dollar-denominated return can be locked in by investing in the British bills? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

If the current exchange rate is $1.95/£, the 1-year forward exchange rate is $2.05/£, and the interest rate on British government bills is 7% per year, what risk-free dollar-denominated return can be locked in by investing in the British bills? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

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

See similar textbooks

Similar questions

Suppose the risk free rate in pounds is 5.12% and the risk free rate in US dollars is 7.71%. The current £ to $ exchange is 1.43. You and a broker want to agree an exchange rate now for a £ to $ conversion, but where the money will be exchanged in precisely 36 months time. What exchange rate (£ to $) should you and your broker use to ensure there is no arbitrage? Give your answer to 2 decimal places.
The one-year interest rate in Australia is given as 0.5% and the one year interest rate in New Zealand is given as 1%. The spot rate of the New Zealand dollar is A$0.95. You will receive 10,000 New Zealand dollars in one year.(a) Using the international Fisher effect, calculate the expected change in the exchange rate for the New Zealand dollar.(b) Using your answer to (a), calculate the amount of Australian dollars you will receive when converting the New Zealand dollars to Australian dollars in one year at the spot rate at that time.
Suppose the current exchange rate for the Polish zloty is Z3.3. The expected exchange rate in 5 years. The expected exchange rate in 5 years is Z3.56. What is the difference in the annual inflation rates for the United States and Poland over this period? Assume that the anticipated rate is constant for both countries.
In June 2010, an investor is considering investing in bank deposits in Korea and Japan. Theannual interest rate on Korean deposits is 6.25%, versus 3.75% on deposits in Japan. Supposethat the forward rate (for June 2011) in June 2010 is equal to F(won/yen) = 8.2. In June 2010, theexpected exchange rate is 8.2 won/¥. For the remainder of this question, use the linearapproximations for uncovered and covered interest rate parity. The spot exchange rate in June2010 is E(won/yen) = 8 a. Does covered interest parity hold in this example?b. Does uncovered interest parity hold in this example?c. Suppose the exchange rate in June 2011 is equal to 7.472 won per yen. Calculate theinvestor’s actual return, assuming that he invests in Japanese deposits in June 2010.How do these answers compare with those from (b)?d. Consider two investors: one uses speculation and the other uses hedging. Based on yourprevious answers, which one earned a higher return (or smaller loss) on Japanese assetsbetween June…
Suppose that investors are risk-neutral and the linear UIP equation holds. You are given the following information: UK interest rate: i = 0.07 US interest rate: i* = 0.02 Expected future spot rate e^e = 8. What is the current spot rate, e? (State your answer as a number to 2 decimal places. Exchange rates are Pounds per Dollar, in natural logs)
c. Consider the spot exchange rate between the € and the pound sterling E€/£=1.50, while the annual forward exchange rate is F€/£=1.60. The annual interest rate is 5.4% in Italy and 5.2% in the UK. Assume that you can borrow up to €1,000,000 or £666,667, at the current spot exchange rate. i. Show how you can make profits from covered interest arbitrage. Consider you are an Italian investor. What is your profit? ii. Explain how the interest rate parity will be restored as a result of covered arbitrage activities. iii. Suppose you are a British investor. Show the covered arbitrage process and compute profits in terms of £. Note: Round your answers to the second decimal point.
Assume the current exchange rate between the US dollar and the UK Pound Sterling is 0.6 ($ per pound). Assuming the purchase price parity theory holds, what is the new exchange rate ($ per pound) if the price level in the US increases by 5% and the price level in the UK increases by 20%?
Subject:- finance
The annual interest rate in Canada is 1.5%, the comparable rate in Europe is 1% and the spot rate for the EUR is CAD 1.4390 /EUR.a.) If covered interest parity holds, what should be the 90 day forward rate?b.) Now assume a Canadian importer is expecting a shipment of goods worth EUR 30 million from France in 90 days which he needs to pay for in EUR and he wants to hedge his exchange rate exposure by using a forward contract. What will be his cost in CAD if he uses a forward contract to hedge is exposure? How much does he lose/gain if the spot rate would rise to CAD 1.4525 /EUR respectively fall to CAD 1.4275 /EUR in the case with the hedge compared to if he just would have waited and purchased the EUR at the then prevailing spot rate? Please state the hypotheticalgains/losses in CAD.c.) What could potentially be the largest loss (expressed in CAD) he could make with the forward contract if the exchange rate could move to very extreme values during this period?
If the interest rate in Oman is 10% and in China is 15%. Current spot exchange rate is CNY16.59/OMR and one-year forward rate is CNY16.57/OMR. If you have the option to borrow OMR 1,000 from bank Muscat for one year then, on the basis of covered interest arbitrage how much arbitrage profit you can make? OMR 51.3880 None of these OMR 1,051.3880 OMR 1,000
the question in the picture says: Suppose that the current exchange rate is £1.73 = $1, but it is expected to be £1.69= $1 in one year. If the current interest rate on a one year government bonf in the united states is 5%, what dies the interest rate parity condition indicate the interest rage will be on a one yeat government bond in Germany? assume that there are no differences in risk, liquidity, taxation, or informatjon costs between the bonds. The German interest rage will be _%? (Round your response to two decimal places.)

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS