The next two questions are based on the following information Consider the following prices in the international money markets: Spot rate: USD1.275/GBP One-year Forward rate: USD1.364/GBP Interest Rate (UK): 2.39% Interest Rate (US): 11.66% Assuming no transaction costs, which of the following statements is true? a. An arbitrage can be obtained by borrowing in the currency that is expressing the other currency. O b. An arbitrage can be obtained by investing in the currency that is expressing the other currency. O c. An arbitrage can be obtained by borrowing in the currency that is being expressed by the other currency. O d. An arbitrage cannot be obtained by investing in the currency that is being expressed by the other currency. e. None of the option in this question are correct. What should the forward rate be for the International Fisher Effect to hold? a. GBP1.4875/USD O b. GBP1.3904/USD O c. USD1.3904/GBP O d. USD1.4875/GBP e. None of the options in this question.

The next two questions are based on the following information Consider the following prices in the international money markets: Spot rate: USD1.275/GBP One-year Forward rate: USD1.364/GBP Interest Rate (UK): 2.39% Interest Rate (US): 11.66% Assuming no transaction costs, which of the following statements is true? a. An arbitrage can be obtained by borrowing in the currency that is expressing the other currency. O b. An arbitrage can be obtained by investing in the currency that is expressing the other currency. O c. An arbitrage can be obtained by borrowing in the currency that is being expressed by the other currency. O d. An arbitrage cannot be obtained by investing in the currency that is being expressed by the other currency. e. None of the option in this question are correct. What should the forward rate be for the International Fisher Effect to hold? a. GBP1.4875/USD O b. GBP1.3904/USD O c. USD1.3904/GBP O d. USD1.4875/GBP e. None of the options in this question.

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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Suppose that Cloudastries Bank is a U.S.-based financial intermediary that serves the foreign exchange market. Assume that this bank is willing to both purchase and sell currency for the same rate. In other words, assume there is no bid/ask spread. Suppose Cloudastries has made the following direct quotations: Currency Dollar Spot Rate $0.55 $1.65 Mexican Peso Euro Additionally, Cloudastries has quoted a cross exchange rate of 1 euro = 3.01 pesos. After exchanging euros for pesos, the last step in triangular arbitrage is to exchange those pesos for dollars. If you exchange your 36,484.84 for dollars from Cloudastries, you would receive This represents a profit of
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