Question 1You are considering uncovered interest arbitrage between the pound (GBP) and the US dollar (USD).The following data is available to you:Funds available: 2 million GBPSpot exchange rate: 1.40 USD per GBPSpot exchange rate one year ago: 1.26 USD per GBPUSD 3 month interest rate: 2.32%GBP 3 month interest rate: 0.75%a) Calculate the profit that would be made if the exchange rate remains at its current level in 3months' time.b) How would the profit figure change if the US dollar continues to weaken at the same rate as it hasdone over the previous year?

The objective of this question is to calculate the profit from uncovered interest arbitrage between…

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International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter14: Multinational Capital Budgeting

Section: Chapter Questions

Problem 3IEE

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1. Assume you notice the following information. Assume you spend $1 million USD to create an arbitrage trading strategy. What is your profit is USD. Remember to consider the profit after you pay back your loan Spot (CAD/USD)=1.75 • 1 Year Forward (CAD/USD) = 1.65 • 1 Year Canadian interest rate of 3% in Canadian Dollars (CAD) • 1 Year US interest rate of 4% in US Dollars (USD) 592,484.85
Use the Information below to answer the following question. SØ ($/ €) F360 ($/ €) Exchange Rate $1.60 €1.00 $1.58 = €1.00 Interest Rate is ię APR 2% 4% If you had €1,000,000, traded them for USD at the spot rate, and invested those dollars in the U.S., how many USD will you get in one year?
D Question 6 (Covered Interest Rate Parity) You are facing the following exchange rates and interest rates. Spot rate (¥/$) 180-day forward rate (¥/$) 102 148 180-day U.S. dollar interest rate 8.5% 180-day Japanese yen interest rate 3.2% If you can borrow $1,000,000 or the equivalent amount of yen, and you can profit from the covered interest arbitrage, then your profit is $ (Please keep two decimal places
Exercise 4: The following exchange rates are available to you. (You can buy or sell at the stated rates.) Assume you have an initial SF12,000,000. Can you make a profit via triangular arbitrage? If so, show the steps and calculate the amount of profit in Swiss francs (Swissies). Mt. Fuji Bank ¥ 92.00/$ Mt. Rushmore Bank SF1.02/$ Mt. Blanc Bank ¥ 90.00/SF
Match each term in Column A with its related definition in Column B. Column A 1. ____________ Spot rate 2. ____________ Currency appreciation 3. ____________ Translation risk 4. ____________ Transaction risk 5. ____________ Exchange rate Column B a. The rate at which one currency can be traded for another currency. b. The possibility that future cash transactions will be affected by changing exchange rates. c. A month ago, 1 U.S. was worth 8.5 Mexican pesos. Today, 1 is worth 9.0 Mexican pesos. The U.S. dollar has undergone what? d. The degree to which a firms financial statements are exposed to exchange rate fluctuation. e. The exchange rate of one currency for another for immediate delivery (today).
Match each term in Column A with its related definition in Column B.Column A1. Spot rate2. Currency appreciation3. Translation risk4. Transaction risk5. Exchange rateColumn Ba. The rate at which one currency can be traded for another currency.b. The possibility that future cash transactions will be affected by changing exchange rates.c. A month ago, $1 U.S. was worth 8.5 Mexican pesos. Today, $1 is worth 9.0 Mexicanpesos. The U.S. dollar has undergone what?d. The degree to which a firm’s financial statements are exposed to exchange ratefluctuation.e. The exchange rate of one currency for another for immediate delivery (today).
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(please correct answer and don't use hand rating) Use the information below to answer the following question. Exchange Rate SO($/€) $ 1.60 = € 1.00 F360($/€) $ 1.58 = € 1.00 Interest Rate APR i$ 2% i€ 4% If you borrowed €1,000,000 for one year, how much money would you owe at maturity?
QUESTION TWO a. Briefly evaluate the factors that may prevent the purchasing power parity from holding in real economies. b. Assume the following information: £ Spot rate = C5.20/€ 12-month forward rate = C6.00/£ C Interest rate = 26% per annum U.K. interest rate = 2% per annum i. Given the information above, does interest rate parity hold? What should be the 12- month forward rate, if interest rate parity holds? ii. How can an investor profit from this anomaly if she can easily borrow the equivalent of £1 million in either pounds or cedis to invest? How much profit can she make?
Q1-14 Suppose the expected spot rate (after 1 year) for euros (in terms of dollars) is $1.50, the current interest rate on euro deposits is 4.5%, and the current interest rate on dollar deposits is 5.5%. What current spot rate would satisfy the uncovered interest parity (UIP) equation? a. $1.65 b. $1.50 c. $1.25 d. $1.485

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