Suppose that the current spot exchange rate is €0.830/S and the three-month forwardexchange rate is €o.815/S. The three-month interest rate is 6.00 percent per annum in theUnited States and 5.40 percent per annum in France. Assume that you can borrow up to$1,000,000 or €830,000.Show how to realize a certain profit via covered interest arbitrage, assuming that you want torealize profit in terms of U.S. dollars. Also determine the size of your arbitrage profit.

Covered interest arbitrage is an arbitrage trading strategy used by an investor to capitalize on the…

Answered: Suppose that the current spot exchange…

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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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?
the current spot exchange rate is $1.85/£ and the three-month forward rate is $1.80/£. Based on your analysis of the exchange rate, you are pretty confident that the spot exchange rate will be $1.82/£ in three months, assume that you would like to buy or sell £1,000,000. a) what actions do you need to take to use these rates to earn a profit? what is the expected dollar profit from speculation? b) What would be your speculative profit in dollar terms if the spot exchange rate actually turns out to be $1.76/£
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%
Currently, the USD/MXN rate is 19.5300 and the three-month forward exchange rate is 20.8400. The three-month interest rate is 3.3% per annum in the U.S. and 6.3% per annum in Mexico. Assume that you can borrow MXP10,000,000 or its equivalent in USD. How much do you make/lose if you borrow locally and invest abroad? (USD, no cents)
Suppose the current exchange rate for the Polish zloty is Z3.3. The expected exchange rate in 5 years. The expected exchange rate in 5 years is Z3.56. What is the difference in the annual inflation rates for the United States and Poland over this period? Assume that the anticipated rate is constant for both countries.
Suppose that the interest rates in Norway and the US are, respectively, 8% and 4%. Suppose that the spot price of the Norwegian Kroner is $0.155. A three - month forward contract on Norwegian Kroner is available for $0.156. Is there a possibility of arbitrage? If yes, how can you earn the arbitrage profit?
A. Suppose the dollar interest rate and the euro interest rate are the same and equal 2 percent per year. Suppose the expected future $/€ exchange rate is $1.20 per 1 €. Suppose now Euro interest rate decreases to 1 percent per year. Determine how the new equilibrium $/€ exchange rate will change if the US interest rate remains constant. B. Indicate how the change in the Euro interest rate will affect the equilibrium $/€ exchange rate and the expected return on euro assets. Explain the changes on the graph.
Suppose that the one-year 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 one-year forward exchange rate, is $1.16/€. Assume that al of these rates will be used and a speculator can borrow $1,000,000 or €1,000,000. This is an example whether Uncovered Interest Arbitrage is possible O This is an example of whether Purchasing Power Parity holds This is an example whether fisher effect holds O None of the above This is an example whether Covered Interest Arbitrage is possible
Suppose you observe that 90-day interest rate across the eurozone is 5%, while the interest rate in the U.S. over the same time period is 1%. Further, the spot rate and the 90-day forward rate on the euro are both $1.60. You have $500,000 that you wish to use in order to engage in covered interest arbitrage. To start, you exchange your $500,000 for (for when you convert the euros back to dollars), you euros, and deposit the funds in a bank in the eurozone. To lock in the exchange rate euros forward at a forward rate of $1.60.
Suppose a U.S. investor wishes to invest in a British firm currently selling for £24 per share. The investor has $48,000 to invest, and the current exchange rate is $2/£.Suppose now the investor also sells forward £24,000 at a forward exchange rate of $1.90/£. Calculate the dollar-denominated returns for each scenario.
The US risk-free rate is 8% and the Mexico rate is 7%. The spot and 10-month forward exchange rates are 20.9 and 19.9 peso/$, respectively. Find the covered interest arbitrage profit (expressed in $) you'll make in10 months if you can borrow either $1M or its equivalent in pesos?
How to calculate IRR and IRP in this question? The answer is 7% in the end, but I do not know how to get it. Consider the situation of firm A and firm B. The current exchange rate is $1.50/€. Firm A is a U.S. MNC and wants to borrow €40 million for 2 years. Firm B is a French MNC and wants to borrow $60 million for 2 years. Their borrowing opportunities are as shown; both firms have AAA credit ratings. $ $ 7% $ 8% € € 6% € 5% A B If firm B could use the forward exchange markets to redenominate a 2-year €40m 5 percent euro loan into a 2-year USD-denominated loan, what would be the interest rate?

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