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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Similar questions

You are an American investor who can borrow $1,000,000 or the equivalent amount in euros today. Suppose the spot rate is $1.18/€, and the one-year forward rate is $1.15/€. The annual interest rate is 4 percent in the U.S. and 2 percent in Germany. Check if IRP holds. If it does not hold, set up a covered interest arbitrage. What will be your profit from this arbitrage opportunity in dollars?
Acacia Bank expects the euro to depreciate against the dollar and plans to take a short position in euros and a long position in dollars. Assume the following1. Interest rate on borrowed euros is 5 percent annualized2. Interest rate on dollars loaned out is 6 percent annualized3. Spot rate is 0.90 per dollar4. Expected spot rate in ten days is 0.95 per dollar5. Acacia Bank can borrow 10 millionDescribe the steps Acacia should take to profit from shorting euros and going long on dollars, show your calculations.
Suppose that you are the CFO of Google with an extra U.S. $20 Million to invest for one year. You are considering the purchase of U.S. T-bills that yield 4% per year. The spot exchange rate is $1.00 = €0.90, and the one-year forward rate is $1.00 = €0.95 . What must the interest rate in the Eurozone (on an investment of comparable risk) be before you are willing to consider investing there instead of the US? a. 9.78% b. 1.56% c. 4.00% d. 5.56%
An investor starts with €1 million and converts them to £694,500 which is then invested for one year. In a year the investor has £736,170 which she then converts back to euros at an exchange rate of 0.68 pounds per euro. The annual euro rate of return earned was .0775 .06 .0826 .0813
After finishing your degree, you decide to go on a post-graduation celebration trip to the UK. You leave with 8,000€ in your pocket. You want to exchange all these € for the U.K. pounds (GBP). Have a look at the WSJ table attached here and identify the following quotes: Spot rate on the EUR: Spot rate on the U.K. pound (GBP): What is the GBP/EUR cross rate? How many U.K. pounds (GBP) will you get for your Euros?
You are an investor currently holding 1.5 million U.S. dollars, and you are contemplating the following strategy. A)Investing in the U.S. 5-year treasury bonds. 1.Find the most profitable strategy. Calculate the future and present values of all strategies. Pls help!
company will receive €75 million in 1 year from an Italian customer. observe the following data. $:€ Spot Rate $1.25:€1.00 $:€ Forward Rate $1.30:€1.00 How many USD will you receive if you employ a forward hedge
Suppose you are a euro-based investor who just sold Microsoft shares that you had bought six months ago. You had invested 10,000 euros to buy Microsoft shares for $120 per share; the exchange rate was $1.03 per euro. You sold the stock for $171 per share and converted the dollar proceeds into euro at the exchange rate of $0.94 per euro. First, determine the profit from this investment in euro terms. Second, compute the rate of return on your investment in euro terms. How much of the return is due to the exchange rate movement? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal places.) Profit Rate of return 51.6 % Rate of return due to exchange rate movement %
You have $ 10 million to invest. If you invest the money in the US for six months, you can earn 2%/year. Alternatively, you can invest in Switzerland and earn 4%/year. The spot exchange rate is CHF 0.9188/$. The forward exchange rate for delivery six months hence is CHF 0.9188/$. Which method of investing do you prefer and what will be the value of your investment at maturity? Assume no transaction cost. O Invest in the US; $10,373,610 Invest in Switzerland; $10,202,013 O None of these O Invest in Switzerland; CHF 10,373,610 O Invest in the US; $10,100,502
A friend of yours tells you that in Japan a specific Japanese treasury note matures for $1000 in two years can be bought or sold for $925. What is the annualized risk-free rate in this example? ) You happen to notice the same security can be purchased or sold domestically for $945, how do you arbitrage this position? How many times should you make this trade? How likely is it that your friend’s information is current and correct?
You can borrow and lend at the interest rates of 6.00% in the US and 4.00% in Canada. Based on Interest Rate Parity, the forward premium for CAD should be exactly equal to:

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