The spot price of gold is US $1000/oz. The quoted 1-year forward price of gold is US $ 1100/oz. The 1 - year US$ interest rate is 5% per annum No income or storage costs for gold Is there an arbitrage opportunity?

The spot price of gold is US $1000/oz. The quoted 1-year forward price of gold is US $ 1100/oz. The 1 - year US$ interest rate is 5% per annum No income or storage costs for gold Is there an arbitrage opportunity?

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

See similar textbooks

Related questions

Q: Which of the following is not a financial instrument: a. A UK gilt. b. 10 ounces of gold. c. A call…

A: It may be Cash instruments or Derivative instruments. It can be real or virtual assets. As per…

Q: An investor has $10m to invest and has the following options: 1) depositing it in a US bank account…

A: Exchange rate: It is the value of a currency that is exchanged with another currency.

Q: The current spot exchange rate equals DDD1 = $3.4567. The risk-free rate in DreamLand is 3%, and it…

A: To evaluate the investment project in DreamLand, we need to calculate the net present value (NPV)…

Q: Suppose the interest rate on investments in GBP is 12% in London and the interest rate for…

A: Covered interest rate parity is used to define the relationship between the forward and spot…

Q: Assume the annual interest rate on a British pound denominated asset maturing in 30 days is 7.5…

A: If Mtoto Company invests $18,000,000 in the dollar-denominated asset, it will earn an annual…

Q: A foreign investment project with an initial cost of $20,000 is expected to produce net cash flows…

A: In order to determine the net present value, the initial cash outflows are required to be subtracted…

Q: 8. Fort Collins, Inc. has $1 million in cash available for 30 days. It can earn 1% on a 30-day…

A: Fort Collins should invest its cash in the country where , cash available in hand after 30 days will…

Q: Consider the following international investment opportunity. It involves a gold mine that can be…

A: Absolutely, to compute the dollar-denominated Net Present Value (NPV) of this project, we need to…

Q: Citigroup recently purchased $10,4 million worth of euro-denominated one-year CDs that pay 10…

A: Foreign exchange refers to the change of one currency into another currency on the basis of demand…

Q: 2.24. The U.S. government fixed the price of gold at $35 an oz in 1934. In 2005, the price of the…

A: In this question we are given following details: Price of Gold in 1934 = $35 per oz Price of Gold in…

Q: suppose that an ounce of gold is equal to $25 in US the exchange rate between USD and GBP is…

A: Variables in the question:An ounce of gold is equal to $25 in USUSD/GBP=0.8

Q: pls fill in blanks

A: These pounds are equivalent to $211,200, which represents a profit of $11,200 over the initial…

Q: Assume that spot rate of New Zealand dollar is AUD 0.64/NZD, the 1-year forward rate of New Zealand…

A: Using arbitrage tactics, one can earn without taking on any risk by taking advantage of pricing…

Q: A. VI00.58 B. V98.55 C. VI01.68 D. 497.42 E. V103.50 An investor starts with $1 million and converts…

A: Calculate the end-dollar amount by Converting 0.7795 million pounds into dollars using exchange rate…

Q: a. If the spot price of gold is $980 per troy ounce, the risk-free interest rate is 7%, and storage…

A: Given information in the questionSpot price of gold = $980Risk free interest…

Q: You want to invest in a project in Canada. The project has an initial cost of C$1.6 million and is…

A: Initial investment = C$1,600,000Cash inflows for 3-years =C $750,000Expected inflation rate in…

Q: Assume the following information: You have $1,000,000 to invest Current spot rate of pound =…

Q: Assume that a future and a forward contract written on silver have one day to maturity. Assume that…

A: Arbitrage opportunity is an investment opportunity in which investor buys a security in one market…

Q: Lakonishok Equipment has an investment opportunity in Europe. The project costs €14 million and is…

A: The NPV of a project refers to the measure of the project's profitability calculated by discounting…

Q: The U.S. government fixed the price of gold at $35 an oz in 1934. In 2005, the price of the yellow…

A: Solution- For calculating price appreciation per year we can use simple compounded interest formula…

Q: Assume the following information (rates are actual 90-day interest rates, not annualized): Spot rate…

A: Given:ParticularsSpot rate1 Canadian Dollar$0.900Forward rate1 Canadian Dollar$0.890Canadian…

Q: Suppose that gold costs USD 330 an ounce in the United States and GBP 220 an ounce in UK. What must…

A: Exchange rate between two countries must be reflected by purchase power parity.

Question

The spot price of gold is US $1000/oz. The
quoted 1-year forward price of gold is US $
1100/oz. The 1-year US$ interest rate is 5%
per annum No income or storage costs for
gold Is there an arbitrage opportunity?

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1: Define of Forward contract

VIEW

Step 2: Explanation

VIEW

Step 3: Calculation of profit from arbitrage oppurtunity

VIEW

Solution

VIEW

Step by step

Solved in 4 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

Annual interest rate on 90-day U.S. asset is 4%, annual interest rate on 90-day UK asset is 8%, and the spot rate is $1=1,000 pound a) If you expect the spot rate to be $1=1075 after three months, where do you invest? b) If you also expect the U.S. interest rate to increase to 5% in 90 days, where do you invest?
1.
fill in blanks pls
Consider the following international investment opportunity. It involves a gold mine that can be opened at a cost, then produces a positive cash flow, but then requires environmental clean-up. Year 0 + -€64,000 Year 1 Year 2 €160,000 -€100,000 The current exchange rate is $1.60 = €1.00. The inflation rate in the U.S. is 6 percent and in the euro zone 2 percent. The appropriate cost of capital to a U.S.-based firm for a domestic project of this risk is 8 percent. Find the euro-zone cost of capital. Write it down in percent with two decimals places.
The duration of the assets to four decimal places:Cash: 0.0000 yearsLoans: 1.7500 yearsTreasuries: 7.0000 years The duration of the liabilities to four decimal places:Time Deposits: 1.7500 yearsCDs: 2.5000 yearsEquity: Not provided If all interest rates decline 90 basis points (ΔR/(1 + R) = -90 basis points), the change in the market value of equity can be calculated as follows:
Assume a risk-free asset in the U.S. is currently yielding 2.7 percent while a Canadian risk-free asset is yielding 2.8 percent and the current spot rate is Can$1.2849 = $1. What is the approximate 6-month forward rate if interest rate parity holds? Can$1.2855 Can$1.2838 Can$1.2843 Can$1.2862 Can$1.2836
27. EXPOSURE OF MNCS TO EXCHANGE RATE MOVEMENTS Arlington Co. expects to receive 10 million euros in each of the next 10 years. It will need to obtain 2 million Mexican pesos in each of the next 10 years. The euro exchange rate is presently valued at $1.38 and is expected to depreciate by 2 percent each year over time. The peso is valued at $.13 and is expected to depreciate by 2 percent each year over time. Review the valuation equation for an MNC. Do you think that the exchange rate movements will have a favorable or unfavorable effect on the MNC?
You want to invest in a riskless project in Australia. The project has an initial cost of AUD3.86 million and is expected to produce cash inflows of AUD 2 million a year for four years. The project will be worthless after four years. The expected inflation rate in Australia is 3.2 percent while it is 2.8 percent in the U.S. A risk-free security is paying 4.1 percent in the U.S. The current spot rate is AUD7.7274. What is the net present value of this project in Australian Dollar if the international Fisher effect applies?

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS