The spot exchange rate is 0.6756 USD per AUD, and the 12-month forward exchange rate is 0.6830 USD per AUD. The 12-month inflation rates in U.S. and Australia are 7.1% p.a. and 7.4% p.a., and the 12-month interest rates in U.S. and Australia are 5.49% p.a. and 4.35%p.a., respectively. Does covered interest rate parity hold? (Round to three decimal places) (A) Yes, it holds. (B) No, it does not hold. (C) The information is not enough for a decision.

The spot exchange rate is 0.6756 USD per AUD, and the 12-month forward exchange rate is 0.6830 USD per AUD. The 12-month inflation rates in U.S. and Australia are 7.1% p.a. and 7.4% p.a., and the 12-month interest rates in U.S. and Australia are 5.49% p.a. and 4.35%p.a., respectively. Does covered interest rate parity hold? (Round to three decimal places) (A) Yes, it holds. (B) No, it does not hold. (C) The information is not enough for a decision.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter22: International Financial Management

Section: Chapter Questions

Problem 1P

See similar textbooks

Similar questions

The current spot rate between the pound and dollar is £.7607/$. The expected inflation rate in the U.S is 3.07 percent and the expected inflation rate in the U.K. is 1.69 percent. Assuming relative purchasing power parity holds, what will the exchange rate be next year?
If the annual inflation rate is 5.5 percent in the United States and 4 percent in the U.K., and the dollar depreciated against the pound by 3 percent, then the real exchange rate, assuming that PPP initially held, is 0.9849. -0.0198. 4.5. 0.07.
The current spot rate between the pound and dollar is £.7562/$. The expected inflation rate in the U.S is 2.47 percent and the expected inflation rate in the U.K. is 3.03 percent. Assuming relative purchasing power parity holds, what will the exchange rate be next year?
The spot rate between the Japanese yen and the U.S. dollar is ¥108.52/$, while the one-year forward rate is ¥108.77/$. The one-year risk-free rate in the U.S. is 2.99 percent. If interest rate parity exists, what is the one-year risk-free rate in Japan?
Currently, the GBP/USD rate is 1.5011 and the six-month forward exchange rate is 1.5261. The six-month interest rate is 7.6% per annum in the U.S. and 5.7% per annum in the U.K. Assume that you can borrow £1,000,000 or its equivalent in USD. How much do you make/lose if you borrow the foreign currency and invest locally? (USD, no cents)
The spot exchange rate between the Swiss Franc and U.S. dollar was 1.0404 ($ per franc). Interest rates in the U.S. and Switzerland were 0.65% and 0.20% per annum, respectively, with continuous compounding. 1.If there is no arbitrage opportunity, what is the three-month forward exchange rate ($ per franc)? 2.Suppose that the three-month forward exchange rate was 1.0300 ($ per franc). Is there an arbitrage? If so, construct the arbitrage that results in zero cash flow today and positive cash flow (in USD) in three months. 3.Calculate the arbitrage profit (in USD) when you implement the arbitrage strategy with 50 Swiss Franc.
Currently, the spot exchange rate is $1.59 per £ and the three-month forward exchange rate is $1.61 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 $1,590,000 or £1,000,000. Required: Determine whether the interest rate parity is currently holding. If the IRP is not holding, how would you carry out covered interest arbitrage? What will be your arbitrage profit? Explain how the IRP will be restored as a result of covered arbitrage activities.
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.
Currently, the spot exchange rate is $1.51 per £ and the three-month forward exchange rate is $1.53 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 $1,510,000 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 If the IRP is not holding, how would you carry out covered interest arbitrage? What will be your arbitrage profit? Note: Do not round intermediate calculations. Interest arbitrage Arbitrage profit Borrow in the U.S. and invest in the U.K. Hedge exchange rate risk by selling British pounds forward. < Required A Required C
The spot exchange rate between the Swiss franc (CHF) and the US dollar (USD) is currently 0.9786 CHF/USD. Six-month interest rates are 2% per annum in the United States and -0.5% (yes, negative) per annum in Switzerland. What is the implied forward rate in CHF/USD?
If the Australian/US dollar exchange rate is 0.72 USD/AUD, US interest rates are 0.25% and Australian interest rates are 0.75% (both for 1 year), what should the 1-year forward USD/AUD exchange rate be?
The spot rate for the Argentine peso is $0.3600 per peso. Over the year inflation in Argentina is 10% and U.S. inflation is 4%. If purchasing power parity holds, at year-end the exchange rate should be approximately ______________ dollars per Real. A. 0.2875 B. 0.2987 C. 0.3384 D. 0.3614