Suppose that the annual interest rate is 5.0 percent in the United States and 3.5 percent in Germany, and that the spot exchange rate is $1.12/€ and the forward exchange rate, with one-year maturity, is $1.16/€. Assume that an arbitrager can borrow up to $1,000,000 or €892,857 (which is the equivalent of $1,000,000 at the spot exchange rate of $1.12/€). 4.The above mentioned scenario a) b) c) d) 5. a) is an example of covered interest arbitrage (CIA), and interest rate parity (IRP) holds is an example of covered interest arbitrage (CIA), and interest rate parity (IRP) does NOT hold is an example of Purchasing Power Parity (PPP), and hyperinflation none of the above The net cash flow in one year is $10,690 $15,000 $46,207 $22,000
Suppose that the annual interest rate is 5.0 percent in the United States and 3.5 percent in Germany, and that the spot exchange rate is $1.12/€ and the forward exchange rate, with one-year maturity, is $1.16/€. Assume that an arbitrager can borrow up to $1,000,000 or €892,857 (which is the equivalent of $1,000,000 at the spot exchange rate of $1.12/€). 4.The above mentioned scenario a) b) c) d) 5. a) is an example of covered interest arbitrage (CIA), and interest rate parity (IRP) holds is an example of covered interest arbitrage (CIA), and interest rate parity (IRP) does NOT hold is an example of Purchasing Power Parity (PPP), and hyperinflation none of the above The net cash flow in one year is $10,690 $15,000 $46,207 $22,000
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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Transcribed Image Text:Suppose that the annual interest rate is 5.0 percent in the United States and 3.5 percent in Germany,
and that the spot exchange rate is $1.12/€ and the forward exchange rate, with one-year maturity,
is $1.16/€. Assume that an arbitrager can borrow up to $1,000,000 or €892,857 (which is the
equivalent of $1,000,000 at the spot exchange rate of $1.12/€).
4.The above mentioned scenario
a)
b)
is an example of covered interest arbitrage (CIA), and interest rate parity (IRP) holds
is an example of covered interest arbitrage (CIA), and interest rate parity (IRP) does NOT
hold
c)
d)
is an example of Purchasing Power Parity (PPP), and hyperinflation
none of the above
The net cash flow in one year is
$10,690
$15,000
$46,207
$22,000
5.
a)
b)
d)
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