Financial Management: Theory & Practice
16th Edition
ISBN: 9781337909730
Author: Brigham
Publisher: Cengage
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Chapter 17, Problem 12P
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To determine: The 90-day forward rate and whether the 90-day forward rate trading at a premium or a discount relative to the spot rate.
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Assume that interest rate parity holds and that 90-day risk-free securities yield 3% in the United States and 3.3% in Germany. In the spot market, 1 euro equals $1.50.
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Chapter 17 Solutions
Financial Management: Theory & Practice
Ch. 17 - Define each of the following terms: a....Ch. 17 - Prob. 2QCh. 17 - Prob. 3QCh. 17 - Prob. 4QCh. 17 - Prob. 5QCh. 17 - Prob. 6QCh. 17 - Should firms require higher rates of return on...Ch. 17 - Prob. 8QCh. 17 - Prob. 9QCh. 17 - Prob. 10Q
Ch. 17 - Prob. 1PCh. 17 - Prob. 2PCh. 17 - Prob. 3PCh. 17 - Prob. 4PCh. 17 - Prob. 5PCh. 17 - Prob. 6PCh. 17 - Prob. 7PCh. 17 - Prob. 8PCh. 17 - Prob. 9PCh. 17 - Prob. 10PCh. 17 - Boisjoly Watch Imports has agreed to purchase...Ch. 17 - Prob. 12PCh. 17 - Prob. 13PCh. 17 - Prob. 14PCh. 17 - Prob. 1MCCh. 17 - Prob. 2MCCh. 17 - Prob. 3MCCh. 17 - Prob. 4MCCh. 17 - Prob. 5MCCh. 17 - Prob. 6MCCh. 17 - Prob. 7MCCh. 17 - Prob. 8MCCh. 17 - Prob. 9MCCh. 17 - Prob. 10MCCh. 17 - Prob. 11MCCh. 17 - Prob. 12MCCh. 17 - Prob. 14MC
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- Assume that interest rate parity holds and that the 90-day risk-free securities yield is 5% in the United States and 5.3% in Germany. In the spot market, 1 euro equals $1.40 (1.4 dollars per euro). What is the 90-day forward rate? rh 1.25% 5.0% rf 1.33% 5.3% Euro 0.7143 $1.40 Spot Rate Forward Rate 1.943396 Is the 90-day forward rate trading at a premium or a discount relative to the spot rate?arrow_forwardAssume that interest rate parity holds. In the spot market 1 Japanese yen = $0.00905, while in the 90-day forward market 1 Japanese yen = $0.00913. In Japan, 90-day risk-free securities yield 1%. What is the yield on 90-day risk-free securities in the United States? Do not round intermediate calculations. Round your answer to two decimal places.arrow_forwardToday, $1 = 1.82 Euro and $1 = 130 Korean Won. In the 90-day forward market, $1 = 1.84 Euro and $1 = 127 Korean Won. Which of the following statements is most correct when interest rate parity holds? Interest rates on 90-day risk-free U.S. securities are higher than the interest rates on 90-day risk-free Euro securities. Since interest rate parity holds, interest rates should be the same in all three countries. Interest rates on 90-day risk-free U.S. securities are higher than the interest rates on 90-day risk-free Korean securities. Interest rates on 90-day risk-free U.S. securities equal the interest rates on 90-day risk-free Korean securities.arrow_forward
- Assume that interest rate parity holds. In both the spot market and the90-day forward market, 1 Japanese yen equals 0.0086 dollar. In Japan,90-day risk-free securities yield 4.6%. What is the yield on 90-day risk-freesecurities in the United States?arrow_forwardAssuming that interest rate parity holds. In both the spot market and the 90 day forward market, 1 Japanese ye equals .0089 dollar. In Japan, 90-day risk free securities yield 4.3%. What is the yield on 90-day risk free securities in the US? Do not round intermediate calculations. Round your answer to two decimals places.arrow_forwardSuppose that the spot price of the euro is currently $1.10. The 1-year futures price is $1.15. Is the interest rate higher in the United States or the euro zone?arrow_forward
- Suppose current one-year interest rate in Europe is 5%, whereas one-year interest rate in the U.S. is 3%. Assume the current spot price of euro (EUR) is $1.10. Answer questions a) and b) below. If the exchange rate movement is consistent with the international Fisher effect (IFE), what will the spot price of EUR in one year be? Consider a trader who does not believe the IFE holds. The trader has decided to borrow $110,000 to invest in EUR-denominated deposits for one year without hedging. Recall the current EUR spot rate is $1.10. If the EUR spot rate in one year turns out to be $1.09, what will be the percentage return on this trading strategy?arrow_forwardIn a market with an unchanged current exchange rate where the interest parity condition holds, if investors now expect the exchange rate to be 6.25% lower a year from now, the return on foreign bonds with an interest rate of 5.75%would be ____enter your response here%. (Enter your response rounded to two decimal places.)arrow_forwardAssume that interest rate parity holds. In both the spot market and the 90-day forward market, 1 Japanese yen equals 0.0088 dollar. In Japan, 90-day risk-free securities yield 4.4%. What is the yield on 90-day risk-free securities in the United States? Do not round intermediate calculations. Round your answer to two decimal places.arrow_forward
- (c) If the one-year interest rate on a dollar denominated Treasury bill is 4.5% p.a. and that on a similar Euro-denominated security is 7.5% p.a. and the current spot rate is USD 1.08/EUR, what forward exchange rate will prevent covered interest arbitrage?arrow_forwardQuantitative Problem: Assume that interest rate parity holds. In the spot market 1 Japanese yen = $0.008, while in the 180-day forward market 1 Japanese yen = $0.0087. 180-day risk-free securities yield 1.25% in Japan. What is the yield on 180-day risk-free securities in the United States? Do not round intermediate calculations. Round your answer to two decimal places.arrow_forwarda. The spot price of the British pound is currently $1.50. If the risk-free interest rate on 1-year government bonds is 1% in the United States and 2% in the United Kingdom, what must be the forward price of the pound for delivery one year from now?b. How could an investor make risk-free arbitrage profits if the forward price were higher than the price you gave in answer to part (a)? Give a numerical example.arrow_forward
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