Question 1 You 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 GBP Spot exchange rate: 1.40 USD per GBP Spot exchange rate one year ago: 1.26 USD per GBP USD 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 3 months' time. b) How would the profit figure change if the US dollar continues to weaken at the same rate as it has done over the previous year?
Question 1 You 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 GBP Spot exchange rate: 1.40 USD per GBP Spot exchange rate one year ago: 1.26 USD per GBP USD 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 3 months' time. b) How would the profit figure change if the US dollar continues to weaken at the same rate as it has done over the previous year?
Chapter14: Multinational Capital Budgeting
Section: Chapter Questions
Problem 3IEE
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
Transcribed Image Text:Question 1
You 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 GBP
Spot exchange rate: 1.40 USD per GBP
Spot exchange rate one year ago: 1.26 USD per GBP
USD 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 3
months' time.
b) How would the profit figure change if the US dollar continues to weaken at the same rate as it has
done over the previous year?
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