In a recent e-news, you observe that the 6-month forward rate is $1.5031/ Euro. Further, if you invest the dollar, it fetches you interest atthe rate of 2% p.a. In comparison, the interest rate in Eurozone is 1%p.a. You also see that CAD 1.5513 are needed to purchase a Euro and CAD1.332 are needed to buy a US$. Is it possible for you to make an arbitrageprofit? If so, which of the arbitrage strategies will you employ andwhat will be the profit? Assume that interest rate parity holds, and youhave one million dollars available to conduct arbitrage

Thus, if we follow the arbitrage strategy described, there would be a loss of 36,021 USD, indicating…

Answered: In a recent e-news, you observe that…

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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Use the information below to calculate the expected gain or loss on the carry trade strategy for an initial borrowed amount of 1,000,000 (you will have to determine the currency of borrowing). Keep at least two decimals in your calculations but round up or down at the end (enter the final answer without decimals). Current spot rate of Polish zloty (PLN/EUR) Expected future spot rate of of zloty (PLN/EUR) in three months Annualized three-month interest rate on Polish zloty (%) Annualized three-month interest rate on euros (%) 3,119,971 135,769 margin of error +/- 10 4.64 4.11 3.77 1.53
Suppose that California Co., a U.S. based MNC, seeks to capitalize a difference in interest rates between euros and British pounds via the use of a carry trade. In particular, after 1 month, funds invested in euros will yield a 0.50% percent return, while funds invested in pounds will yield a return of 2.00% percent. Currently the spot rate of the British pound is $1.00 while the spot rate of the euro is $0.80. In other words, the pound is worth 1.25 euros. California Co. expects these spot rates to remain constant over the next month. After 1 month, California Co. now has 693,600 pounds after investing their converted pounds. However, it is now time for California Co. to repay the 600,000 euro loan. If California Co. borrowed these euros at the prevailing rate of 0.50% percent, they must repay a total of rate of 1.25, this repayment is equivalent to pounds. euros. At the cross pounds. Thus, after repaying the loan, California Co. will have
Suppose the bank will give you 5 percent interest rate for your money on deposit and the rate of inflation is 3 percent. In this case you must sacrifice €100 euros of current consumption in order to enjoy: A €105 of future consumption B €5 of future consumption C €102 of future consumption in real terms D €108 of future consumption in real terms
I would appreciate it if this was done in excel please A US bank converts $ 1 million to SF to make an SF loan to a valued customer when the exchange rate was 1.53 SF per USD. The borrower agrees to repay the principal plus 6.25% interest in one year. The borrower repaid SF at loan maturity and when the loan was repaid the exchange rate was 1.63 SF per USD. What was the bank's dollar rate of return?
Because it is unlikely she will be able to visit you this year, your wealthy Canadian aunt wants to send you a present for your birthday. You expect she will give you CAD 4664 in 10 months. Having taken this course, you know you can lock in the AUD rate for this CAD receivable using a money market hedge. If (annualized) 10-month interest rates in the Canada are 7%, 10-month interest rates in Australia are 3.2%, and the current spot rate is 1.8 AUD/CAD, what is the locked in AUD value of this birthday present? Select the closest answer. a. 1.8555 b. 8144.0050 c. 8704.3256 d. 2671.0317 e. 8654.1429
Suppose that the U.S. interest rate on one year Treasury notes was 4.5%. We will use this as the annual interest rate in the U.S. And suppose that the interest rate on the one-year German Treasury note was 4.1%. The spot rate is 1.0162 EUR/USD.. And the 3-month forward rate is 1.0188 Eur/USD. Is there an opportunity for covered interest arbitrage? If so, what would be the total profit if we borrowed $20 million for 3 months? A. YES- $27,395.21 would be the profit B. YES- $29,385.41 would be the profit C. YES- $31,695.53 would be the profit D. YES- $33,875.42 would be the profit E. NO- there is no opportunity for a profit
Given: interest rates are 6% in the U.S. and 15% in the U.K. The spot exchange rate for British pounds is 1.27 $/£ and the 1-year forward rate is F1 - yr = 1.19 $/£. You wish to borrow dollars. a. How can you effectively (synthetically) borrow $100,000 for one year without using the U.S. money market? (List each transaction you would make including the amounts of each currency involved. You may use either continuous compounding or discrete compounding as long as you show your calculations.) b. What is the implied interest rate on your synthetic loan? c. Should you borrow directly or synthetically, and why? d. How could an arbitrageur make a risk-free profit?
According to this morning's The National Post, you can exchange $1 for $0.77 U.S. in three months. Thus, the ________ is $1.30 Canadian. A. Backward rate. B. Forward rate. C. Futures rate. D. Triangle rate. E. Spot rate.
A European firm borrows MXN from a Mexico bank at a 7% interest rate. Over that same time, the Euro appreciates 2.70% against the MXN. What is the European firm's €-denominated equivalent cost of borrowing?
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You are the treasury department of a JFINEX Bank and your client has some excess Euros. If he wants to sell EUR to you, what will be your EUR buying rate if you want 0.020 spread assuming the inter-bank market quote is EUR/USD 1.1580 - 1.6100? 1.1560 1.5900 1.1380 1.6300
Please help and show calculation. Consider two companies: Honda and IBM. Honda wants to borrow US$ for the following 5 years at a fixed rate, while IBM wants to borrow Yen also for the following 5 years at a fixed rate. The rates available to two companies in US$ and Yen markets are shown below. US$ Yen Honda 8.0% 7.6% IBM 5.4% 6.6% 1. What is the total gain from the currency swap? Which firm has the comparative advantage in US dollar market, IBM or Honda?

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