Suppose that the one-year U.S. interest rate is 8% and the equivalent one-year India interest rate is 12%. According to approximate covered interest parity, is there a forward premium, forward discount or forward flat on the dollar?

Suppose that the one-year U.S. interest rate is 8% and the equivalent one-year India interest rate is 12%. According to approximate covered interest parity, is there a forward premium, forward discount or forward flat on the dollar?

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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1) The ER between the Swiss franc and the US dollar is one to one in the spot market. The interest rates in Switzerland and the US are .01 and .03 respectively. Swiss franc. What kind of arbitrage will induce a profit for you, if the forward rate is .96 Swiss francs equal $1? Assume you start with $1 million.
Assume that the U.S. interest rate is 7 percent and the euro’s interest rate is 4 percent. Assume that the euro’s forward rate has a premium of 2 percent. a. What is the effective financing rate from financing with euros? Should a U.S. firm finance with euros?
Suppose that exchange rate between the dollar and the peso is in equilibrium when inflation in the U.S. rises to 5.00%. At the same time, inflation in Mexico is 3.50%. If the inflation rate in the U.S. is denoted as I and the inflation rate in Mexico is If, then which of the following expressions represents the percent change in the peso under PPP? 1+If 1+In 1+In 1+1 - - 1 1 0.0145 -1.43% 1+/ +1 1+1 198.57% 1+If 1+1h +1 201.45% According to this formula, percentage change in the peso should be under PPP.
) In another case are these quotes: Spot rate €1.2562/£; 1 month forward €1.2662/£. Which of the two currencies is trading at forward premium?
Assume the following information (rates are actual 90-day interest rates, not annualized): Spot rate of Canadian dollar S 0.900 90 day forward rate of Canadian dollar $0.890 90-day Canadian interest rate 3.50% 90-day U.S. interest rate 2.40% Given this information, the yield (percentage return) to a U. 5. investor who used covered interest arbitrage would be ( assume the investor invests $1 million). The yield (percentage return) to a Canadian investor who used covered interest arbitrage would be Group of answer choices
The current USD/EUR exchange rate is [de] dollar per euro. The one-year forward exchange rate is [fe]. The one-year USD interest rate is [rus]% p.a. semiannually compounded. Estimate the one-year EUR interest rate (p.a. semiannually compounded, stated in percent). Inputs: de, fe, rus = 1.85, 1.75, 1.31 Tip: Use the CIP
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Suppose that the current EUR/GBP rate is 0.6668 and the one-year forward exchange rate is 0.6742. The one-year interest rate is 1.8% in euros and 3.6% in pounds. You can borrow at most €1,000,000 or the equivalent pound amount. Suppose you are a pound-based investor. Determine the profit/loss (in GBP, no cents) if you borrow locally and invest in Euros.
Assume the spot rate on the New Zealand dollar is NZ$1.0926, the risk-free nominal rate in the U.S. is 3.8 percent and 4.1 percent in New Zealand. What is the four-year forward rates best establishes the approximate interest rate parity condition?
Changes in Forward Premiums Assume that the Japanese yen’s forward rate currently exhibits a premium of 6 percent and that interest rate parity exists. If U.S. interest rates decrease, how must this premium change to maintain interest rate parity? Why might we expect the premium to change?
You can buy or sell the yen spot at ¥102 to the dollar. You can buy or sell the yen one-year forward at ¥104 to the dollar. If U.S. annual interest rates are 4%, what must be the approximate one-year Japanese interest rate if interest rate parity holds? A. 3.20% B. 5.92% C. 2.75% D. 4.73%
Currently, the spot exchange rate is $1.67 per £ and the three-month forward exchange rate is $1.69 per £. The three-month interest rate is 8.0% per annum in the U.S. and 5.8% per annum in the U.K. Assume that you can borrow as much as $1,670,000 or £1,000,000. Required: a. Determine whether the interest rate parity is currently holding. b. If the IRP is not holding, how would you carry out covered interest arbitrage? What will be your arbitrage profit? c. Explain how the IRP will be restored as a result of covered arbitrage activities. Complete this question by entering your answers in the tabs below. Required A Required B Required C Determine whether the interest rate parity is currently holding. Determine whether the interest rate parity is currently holding.

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