Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 27, Problem 11PS
Summary Introduction
To discuss: 3-month interest rate on Country B real and the effects if the rate is substantially above the arrived value.
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Current interest rates are i$ = 4%;i€ = 6%. Expected interest rates next year are: i$ = 7%;i
€ = 3%. The expected spot rate in two years is S2($/€) = 1. Use the asset market approach
to compute the current spot rate S0($/€). Please type in the number without the currency
signs. For example, if your answer is $1.25/€, then type in 1.25 as your final answer. Please
keep at least three decimal places (up to 5 decimal places)
Current interest rates are is=4%;ie=6%. Expected interest rates next year are
is-7%;ie=3%. The expected spot rate in two years is S2($/€)=1.07. Use the asset
market approach to compute the current spot rate So($/€). Please type in the
number without the currency signs. For example, if your answer is $1.25/€, then
type in 1.25 as your final answer. Please keep at least three decimal places (up to 5
decimal places).
You Answered
1.09
Correct Answer
1.05 margin of error +/- 1%
Suppose the dollar interest rate and the pound sterling interest rate are the same, 6 percent per year.
What is the relation between the current equilibrium dollar/pound exchange rate and its expected future level?
O A. Expected dollar/pound exchange rate is higher than the current one.
O B. Expected dollar/pound exchange rate is lower than the current one.
C. Expected dollar/pound exchange rate is equal to the current one.
O D. One cannot tell given the information above.
Suppose the expected future exchange rate, $1.44 per pound, and the US interest rate remain constant, while Britain's interest rate rises to 8 percent per year. What is the new equilibrium dollar/pound exchange rate?
New equilibrium exchange rate is $ per pound. (Enter your response to the nearest penny.)
Chapter 27 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
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- What exact real rate of return is implied by a nominal return of 6% and an inflation rate of 2.4% over the same time period?(please write answer in a decimal format using 5 decimal places)arrow_forwardassuming japan to be the home country, suppose you have the following data: Japanese interst rate=1% p.a., Brazilian interest rate = 10% p.a. Spot rate=0.025BRL/Yen, 1 year forward rate=0.026BRL/yen 1). Compute the annualized forward premium/discount on Yen b). Compute the annual interest rate differential between countries c). is tere a possibilit for earning risk-free profit? if soc compute the profit if you have an equivalent of 100 million Yen at your disposal. d). what is such a profit called? e). at what forward rate, the profit making arrangement will lose its lucrativeness?arrow_forwardSuppose you observe that 90-day interest rate across the eurozone is 5%, while the interest rate in the U.S. over the same time period is 1%. Further, the spot rate and the 90-day forward rate on the euro are both $1.60. You have $500,000 that you wish to use in order to engage in covered interest arbitrage. To start, you exchange your $500,000 for (for when you convert the euros back to dollars), you euros, and deposit the funds in a bank in the eurozone. To lock in the exchange rate euros forward at a forward rate of $1.60.arrow_forward
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