International finance chapter 7
If the relationship that is specified by interest rate parity does not exist at any period but does exist on average, then covered interest arbitrage should not be considered by U.S. firms. Do you agree or disagree with this statement? Explain.
Disagree. If at any point in time, interest rate parity does not exist, covered interest arbitrage could earn excess returns.
Assume that the forward rate premium of the euro was higher last month than it is today. What does this imply about interest rate differentials between the United States and Europe today compared to those last month?
The interest rate differential is smaller-Select-smallergreaterItem 1 now than it was last month.
The bank is willing to buy dollars for 0.88 euros per dollar. It is willing to sell dollars for 0.90 euros per dollar. You can sell Australian dollars (A$) to the bank for $0.71. You can buy Australian dollars (A$) from the bank for $0.72. The bank is willing to buy Australian dollars (A$) for 0.68 euros per A$. The bank is willing to sell Australian dollars (A$) for 0.69 euros per A$. You have $100,000. Estimate your profit or loss if you were to attempt triangular arbitrage by converting your dollars to Australian dollars, then converting Australian dollars to euros, and then converting euros to U.S. dollars. Use a minus sign to enter a loss, if any. Do not round intermediate calculations. Round your answer to the nearest dollar.
$100,000/$0.72 = A$138,889 A$138,889 × 0.68 = 94,444 euros. 94,444 euros/0.90 = $104,938 Gain = $104,938 - $100,000 = $4,938
You can sell Canadian dollars (C$) to the bank for $0.68.You can buy Canadian dollars (C$) from the bank for $0.70.The bank is willing to buy dollars for 0.89 euros per dollar.The bank is willing to sell dollars for 0.94 euros per dollar.The bank is willing to buy Canadian dollars for 0.62 euros per C$.The bank is willing to sell Canadian dollars for 0.66 euros per C$. You have $110,000. Estimate your profit or loss if you would attempt triangular arbitrage by converting your dollars to euros, and then convert euros to Canadian dollars and then convert Canadian dollars to U.S. dollars. Use a minus sign to enter a loss, if any. Do not round intermediate calculations. Round your answer to the nearest dollar.
$110,000 × 0.89 = 97,900 euros97,900/0.66 = C$148,333.33C$148,333.33 × $0.68 = $100,867 Profit = $100,867 - $110,000 = -$9,133 [loss]
Spot rate of Canadian dollar$0.8090 day forward rate of Canadian dollar$0.78 90 day Canadian interest rate5% 90 day U.S. interest rate2.2% Given this information, what would be the yield (percentage return) to a U.S. investor who used covered interest arbitrage? (Assume the investor invests $4 million.) Round your answer to one decimal place.
$4,000,000/$0.80 = C$5,000,000 × (1.05)= C$5,250,000 × $0.78= $4,095,000 Yield = ($4,095,000 - $4,000,000)/$4,000,000 = 2.4%, which exceeds the yield in the U.S. over the 90-day period.
Suppose that the six-month interest rate in the United States is 4%, while the six-month interest rate in Mexico is 8%. Further, assume the spot rate of the peso is $0.40. According to interest rate parity (IRP), the forward rate premium of the peso with respect to the U.S. dollar should be
((1+4%)/(1+8%))-1 =-3.7037% 1+h interest /1+f interest all divided by one
interest rate parity
(IRP) is an equilibrium state in which covered interest arbitrage is no longer profitable. That is, exchange rates and interest rates have adjusted such that the difference between the forward rate of a currency and the spot rate of a currency just offsets any differences in interest rates.
IRP graphed line
45* angle Along this line, the interest rate differential and the forward premium (or discount) are exactly equal
ssume that annual interest rates in the United States are 9 percent, while interest rates in France are 7 percent. A.According to IRP, what should the forward rate premium or discount of the euro be? Round your answer to two decimal places. Enter your answer as a positive value. B.If the euro's spot rate is $1.16, what should the one-year forward rate of the euro be? Do not round intermediate calculations. Round your answer to three decimal places.
A .09/1.07 -1 B. F = $1.16(1 + 0.0187) = $1.182
Assume that interest rate parity exists. As of this morning, the one-month interest rate in Canada was lower than the one-month interest rate in the United States. Assume that as a result of the Fed's monetary policy this afternoon, the one-month interest rate in the United States declined this afternoon, but was still higher than the Canadian one-month interest rate. The one-month interest rate in Canada remained unchanged.
Based on the information, the forward rate of the Canadian dollar exhibited a premium-Select-premiumdiscountItem 1 this morning that decreased-Select-decreasedincreasedItem 2 this afternoon.
Assume that cross exchange rates are always proper such that triangular arbitrage is not feasible. While at the Miami airport today, you notice that a U.S. dollar can be exchanged for 125 Japanese yen, or 4 Argentine pesos at the foreign exchange booth. Last year, the Japanese yen was valued at $0.01, and the Argentine peso was valued at $0.30. Based on this information, the Argentine peso has changed by what percent against the Japanese yen over the last year? Round your answer to two decimal places.
Convert peso to direct exchange rate:Peso = 1/4 of $1 = $0.25 Convert yen to direct exchange rate:Yen = 1/125 = $0.008 Cross-rate now:Peso = $0.25/$0.008 = 31.25 yenCross-rate last year:Peso = $0.30/$0.01 = 30.00 yen Change = (31.25 - 30.00) / 30.00 = +4.17%
Assume that the one-year U.S. interest rate is 7 percent, while the one-year interest rate in Malaysia is 40 percent. Assume that a U.S. bank is willing to purchase the currency of that country from you one year from now at a discount of 14 percent. Would covered interest arbitrage be worth considering? Do not round intermediate calculations. Round your answer to one decimal place.
Covered interest arbitrage would be worth considering since the return would be 20.4 percent, which is much higher than the U.S. interest rate. Assuming a $1,000,000 initial investment, $1,000,000 × (1.40) × 0.86 = $1,204,000 Yield = ($1,204,000 - $1,000,000)/$1,000,000 = 20.4% However, the funds would be invested in Malaysia, which could cause some concern about default risk or government restrictions on convertibility of the currency back to dollars.
You have $400,000 to invest The current spot rate of the Moroccan dirham is $0.118. The 60-day forward rate of the Moroccan dirham is $0.121. The 60-day interest rate in the United States is 4 percent. The 60-day interest rate in Morocco is 2 percent. What is the yield to a U.S. investor who conducts covered interest arbitrage? Do not round intermediate calculations. Round your answer to two decimal places.
Covered interest arbitrage would involve the following steps: Convert dollars to Moroccan dirham: $400,000/$0.118 = MD3,389,830.51 Deposit the dirham in a Moroccan bank for 60 days. You will have MD3,389,830.51 × (1.02) = MD3,457,627.12 in 60 days. In 60 days, convert the dirham back to dollars at the forward rate and receive MD3,457,627.12 × $0.121 = $418,372.88 The yield to the U.S. investor is $418,372.88/$400,000 - 1 = 4.59%. Covered interest arbitrage worked for the investor in this case. The higher Moroccan forward rate more than offsets the lower interest rate in Morocco.
You obtain the following quotes from different banks. One bank is willing to buy or sell Japanese yen at an exchange rate of 119 yen per dollar. A second bank is willing to buy or sell the Argentine peso at an exchange rate of $0.32 per peso. A third bank is willing to exchange Japanese yen at an exchange rate of 1 Argentine peso = 39 yen.
Direct rate of peso = $0.32Direct rate of yen = 1/119 = $0.0084Cross rate of peso should be 38.08 yen But the actual peso cross rate is higher than it should be. So obtain pesos and convert to yen, and then convert to dollars. $1,100,000 / 0.32 = 3,437,500 pesos × 39 = 134,062,500 yen / 119 = $1,126,576. Profit is $26,576.
Assume that Mexico's economy has expanded significantly, causing a high demand for loanable funds there by local firms. How might these conditions affect the forward discount of the Mexican peso?
Expansion in Mexico creates a demand for loanable funds, which places upward-Select-upwarddownwardItem 1 pressure on Mexican interest rates, which increases-Select-increasesreducesItem 2 the forward discount on the Mexican peso (or reduces-Select-increasesreducesItem 3 the premium).
Assume that interest rate parity exists and will continue to exist. On September 1, the one-year interest rate of Singapore is 4 percent versus 7 percent in the United States. The Singapore central bank is expected to decrease interest rates in the future so that as of December 1, you expect that the one-year interest rate in Singapore will be 2 percent. The U.S. interest rate is not expected to change over time. Based on the information, explain how the forward premium (or discount) is expected to change by December 1.
For all situations in which the foreign interest is less than the US, the forward rate should exhibit a premium-Select-premiumdiscountItem 1 that is the same as the difference in interest rates. The differential is expected to increase-Select-increasedecreaseItem 2 over time, so the premium-Select-premiumdiscountItem 3 will become larger-Select-largersmallerItem 4 .
Assume that interest rate parity exists. The spot rate of the Argentine peso is $0.40. The one-year interest rate in the United States is 7 percent versus 13 percent in Argentina. Assume the futures price is equal to the forward rate. An investor purchased futures contracts on Argentine pesos, representing a total of 1,000,000 pesos. Determine the total dollar amount of profit or loss from this futures contract based on the expectation that the Argentine peso will be worth $0.42 in one year. Use a minus sign to enter a loss, if any. Do not round intermediate calculations. Round your answer to the nearest dollar.
Forward premium = (1 + 0.07)/(1 + 0.13) - 1 = -0.053097 Forward rate = $0.40 × (1 - 0.053097) = $0.37876 Profit = ($0.42 - $0.37876) × 1,000,000 pesos = $41,239 Note: While the calculations above show values rounded to five and six decimal places, unrounded values should be used in your calculations.
Today, the one-year U.S. interest rate is 5 percent, while the one-year interest rate in Argentina is 14 percent. The spot rate of the Argentine peso (AP) is $0.40. The one-year forward rate of the AP exhibits a 12% discount. Determine the yield (percentage retrun on investment) to an investor from Argentina who engages in covered interest arbitrage. Do not round intermediate calculations. Round your answer to two decimal places.
Forward rate of Argentine peso = $0.40 × (1 - 0.12) = $0.352. Assume Argentine investors invest AP100,000. [You can start with any assumed amount.] AP100,000 × $0.40 = $40,000 Invest in U.S.: $40,000 × (1.05) = $42,000 Convert back to AP: $42,000/$0.352 = AP119,318 Yield = (AP119,318 - AP100,000)/AP100,000 = 19.32%.
Consider investors who invest in either U.S. or British one-year Treasury bills. Assume zero transaction costs and no taxes.
If interest rate parity exists, then the return for U.S. investors who use covered interest arbitrage will be the same as the return for U.S. investors who invest in U.S. Treasury bills.
Assume that the one-year interest rate in the United Kingdom is 9 percent, while the one-year interest in the United States is 4 percent. The spot rate of the pound is $1.50. Assume that interest rate parity exists. The quoted one-year interest in the United Kingdom is expected to decline consistently over the next month. Meanwhile, the quoted one-year interest rate in the United States is expected to rise consistently over the next month. Assume that the spot rate does not change over the month. Based on this information, how will the quoted one-year forward rate change over the next month?
It should rise consistently over the next month.
Suppose you observe that 90-day interest rate across the eurozone is 4%, while the interest rate in the U.S. over the same time period is 2%. Further, the spot rate and the 90-day forward rate on the euro are both $1.60.
If many individuals recognize the same arbitrage opportunity, and sell euros forward just as you did, this would place downward pressure on the forward rate. This would continue until the discount on the forward rate (relative to the current spot rate) was approximately 2% . Market realignment can quickly eliminate covered interest arbitrage opportunities, as well as other types of arbitrage opportunity. In the case of covered interest arbitrage, if individuals observe a higher interest rate in one country and begin selling that country's currency forward, this will put downward pressure on the forward rate for that currency. This will continue until the discount on the forward rate is about equal to the interest rate differential between the two countries. In this fictional example, since the eurozone has a 2% higher interest rate, individuals will sell euros forward until the forward rate has about an 2% discount relative to the current spot rate. At this point, the opportunity to profit from covered interest arbitrage has been essentially eliminated.
Why would U.S. investors consider covered interest arbitrage in France when the interest rate on euros in France is lower than the U.S. interest rate?
If the forward premium more than offsets the lower interest rate, investors could use covered interest arbitrage by investing in euros and achieve higher returns than in the U.S.
Assume that the one-year interest rate in Canada is 3 percent. The one-year U.S. interest rate is 7 percent. The spot rate of the Canadian dollar (C$) is $0.91. The forward rate of the Canadian dollar is $0.96.
Is covered interest arbitrage feasible for U.S. investors? Show the results if a U.S. firm engages in covered interest arbitrage to support your answer. Do not round intermediate calculations. Round your answer to two decimal places. U.S. investors can-Select-cancannotItem 1 benefit from covered interest arbitrage because U.S. investors would generate a yield of %, which exceeds-Select-exceedsis less thanItem 3 the U.S. interest rate of 7 percent To determine the yield from covered interest arbitrage by U.S. investors, start with an assumed initial investment, such as $1,000,000. $1,000,000/$0.91 = C$1,098,901 × (1.03)= C$1,131,868 × $0.96 = $1,086,593Yield = ($1,086,593 - $1,000,000)/$1,000,000 = 8.66% Thus, U.S. investors can benefit from covered interest arbitrage because this yield exceeds the U.S. interest rate of 7 percent.
Spot rate of British pound = $1.80 6-month forward rate of pound = $1.82 12-month forward rate of pound = $1.80
Is the annualized 6-month U.S. risk-free interest rate above, below, or equal to the British risk-free interest rate? The 6-month U.S. risk-free interest rate must be above-Select-abovebelowequal toItem 1 the 6-month British risk-free interest rate. Is the 12-month U.S. risk-free interest rate above, below, or equal to the British risk-free interest rate? The 12-month U.S. risk-free interest rate must be equal to-Select-abovebelowequal toItem 2 the 12-month British risk-free interest rate.
Purchasing a currency at a location where it is cheaply priced and immediately selling it at another location where the price is higher
Which of the following most accurately describes locational arbitrage?
ssume that the annual U.S. interest rate is currently 8 percent and Japan's annual interest rate is currently 7 percent. The spot rate of the Japanese yen is $0.01. The one-year forward rate of the Japanese yen is $0.01. Assume that as covered interest arbitrage occurs, the interest rates are not affected, and the spot rate is not affected. Explain how the one-year forward rate of the yen will change in order to restore interest rate parity, and why it will change. [Your explanation should specify which type of investor (Japanese or U.S.) would be engaging in covered interest arbitrage and whether these investors are buying or selling yen forward, and how that affects the forward rate of the yen.]
Japanese-Select-JapaneseU.S.Item 1 investors will be able to engage in covered interest rate arbitrage. They will exchange yen for dollars-Select-yen for dollarsdollars for yenItem 2 and also buy-Select-buysellItem 3 one-year yen forward contracts. This will cause an upward-Select-an upwarda downwardItem 4 pressure on the one-year forward yen rate.
Earlier this morning, the annual U.S. interest rate was 6 percent and Mexico's annual interest rate was 8 percent. The spot rate of the Mexican peso was $0.16. The one-year forward rate of the peso was $0.15. Assume that as covered interest arbitrage occurred this morning, the interest rates were not affected, and the spot rate was not affected, but the forward rate was affected, and consequently interest rate parity now exists. Explain which type of investor (Mexican or U.S.) engaged in covered interest arbitrage, whether they were buying or selling pesos forward, and how that affected the forward rate of the peso.
Mexican-Select-MexicanU.S.Item 1 investors engaged in covered interest arbitrage by exchanging pesos for dollars-Select-pesos for dollarsdollars for pesosItem 2 today and then buying-Select-buyingsellingItem 3 pesos forward. It placed upward-Select-downwardupwardItem 4 pressure on the forward rate of the peso
The South African rand has a one-year forward premium of 2 percent. One-year interest rates in the U.S. are 3 percentage points higher than in South Africa. Based on this information, is covered interest arbitrage possible for a U.S. investor if interest rate parity holds?
No, covered interest arbitrage is not possible for a U.S. investor. Although the investor can lock in the higher exchange rate in one year, interest rates are 3 percent lower in South Africa.
Assume that the spot rate of the Brazilian real is $0.25. The annual U.S. interest rate is currently 4 percent and Brazilian annual interest rate is currently 7 percent. Assume that interest rate parity exists. Determine the one-year forward rate of the Brazilian real. Do not round intermediate calculations. Round your answer to the nearest cent.
Plug the one-year U.S. interest rate and one-year Brazilian interest rate into the forward rate premium formula: Forward rate (FR) Premium = [(1 + U.S. interest rate)/(1 + Brazilian interest rate)] - 1 Forward rate (FR) Premium = [(1 + 4%)/(1 + 7%)] - 1 = -2.80% Derive the FR as Brazilian real spot rate × (1 + FR Premium) Derive the FR as $0.25 × (1 + (-2.80%) = $0.24
If U.S. firms attempt to use covered interest arbitrage to capitalize on the high Argentine peso interest rate, what forces should occur?
Spot rate of peso increases; forward rate of peso decreases
Assume that the Swiss interest rates are higher than U.S. interest rates, and that interest rate parity exists. Which of the following is true?
Swiss investors who attempt covered interest arbitrage earn a higher return than American investors who attempt covered interest arbitrage.
Assume that interest rate parity exists. The 6-month forward rate of the Swiss franc has a premium while the 12-month forward rate of the Swiss franc has a discount. What does this tell you about the relative level of Swiss interest rates versus U.S. interest rates?
The 6-month Swiss interest rate must be lower-Select-lowerhigherItem 1 than the 6-month U.S. interest rate. The 12-month Swiss interest rate must be higher-Select-lowerhigherItem 2 than the 12-month U.S. interest rate.
Assume that the existing U.S. one-year interest rate is 10 percent and the Canadian one-year interest rate is 11 percent. Also assume that interest rate parity exists. Should the forward rate of the Canadian dollar exhibit a discount or a premium?
The Canadian dollar's forward rate should exhibit a discount because its interest rate exceeds the U.S. interest rate. U.S. investors would earn a return of 10 percent using covered interest arbitrage, the same as what they would earn in the U.S. Canadian investors would earn a return of 11 percent using covered interest arbitrage, the same as they would earn in Canada.
As of now, the nominal interest rate is 6 percent in the United States and 6 percent in Australia. The spot rate of the Australian dollar is $0.58, while the one-year forward rate of the Australian dollar exhibits a premium of 2 percent. Assume that as covered interest arbitrage occurred this morning, the interest rates were not affected, the spot rate of the Australian dollar was not affected, but the forward rate of the Australian dollar was affected. Consequently interest rate parity now exists. Explain the forces that caused the forward rate of the Australian dollar to change.
The U.S.-Select-AustralianU.S.Item 1 investors could benefit from engaging in covered interest arbitrage; their arbitrage would involve selling-Select-buyingsellingItem 2 Australian dollars forward, which would cause the forward rate of the Australian dollar to decrease-Select-increasedecreaseItem 3 .
The terrorist attack on the U.S. on September 11, 2001 caused expectations of a weaker U.S. economy. Explain how such expectations could have affected U.S. interest rates, and therefore have affected the forward rate premium (or discount) on various foreign currencies.
The expectations of a weaker U.S. economy resulted in a decline-Select-declineriseItem 1 of short-term interest rates. The U.S. interest rate was reduced-Select-reducedincreasedItem 2 while foreign interest rates were not. Therefore, the forward premium on foreign currencies decreased-Select-decreasedincreasedItem 3 , or the forward discount became more-Select-morelessItem 4 pronounced.
Today, the annualized interest rate in the United States is 6 percent for any debt maturity. The annualized interest rate in Australia is 4 percent for debt maturities of three months or less, 5 percent for debt maturities between three months and six months, and 6 percent for debt maturities more than six months. Assume that interest rate parity exists. Does the forward rate quoted today for the Australian dollar exhibit a premium or a discount, or does your answer vary with specific conditions? Briefly explain.
The forward rate of the Australian dollar exhibits a premium for maturities less than 6 months (since the Australian interest rates are lower than U.S. interest rates for those maturities), and no discount or premium for any maturities beyond 6 months since interest rates are the same.
If the U.S. interest rate is close to zero, while the interest rate of Russia was very high, what would interest rate parity suggest about the forward rate of the Russian ruble? Explain.
The forward rate of the Russian ruble should exhibit a discount. If not, a U.S. investor could have conducted covered interest arbitrage by converting dollars to rubles, investing in Russia, and simultaneously selling rubles forward.
Assume that interest rate parity exists and will continue to exist. As of this morning, the one-month interest rate in the United States was higher than the one-month interest rate in the eurozone. Assume that as a result of the European Central Bank's monetary policy this afternoon, the one-month interest rate of the euro increased and is now higher than the U.S. one-month interest rate. The one-month interest rate in the United States remained unchanged.
The one-month forward rate of the euro exhibited a premium-Select-discountpremiumItem 1 this morning.
Assume that the Japanese yen's forward rate currently exhibits a premium of 6 percent and that interest rate parity exists. If U.S. interest rates decrease, how must this premium change to maintain interest rate parity? Why might we expect the premium to change?
The premium will decrease-Select-decreaseincreaseItem 1 in order to maintain IRP, because the difference between the interest rates is reduced-Select-reducedincreasedItem 2 . We would expect the premium to change because as U.S. interest rates decrease, U.S. investors-Select-U.S. investorsJapanese investorsItem 3 could benefit from covered interest arbitrage if the forward premium stays the same.
Why do you think currencies of countries with high inflation rates tend to have forward discounts?
These currencies have high interest rates, which cause forward rates to have discounts as a result of interest rate parity.
Assume that the 30-day forward premium of the euro is 1 percent, while the 90-day forward premium of the euro is 2 percent. Explain the likely interest rate conditions that would cause these premiums. Does this ensure that covered interest arbitrage is worthwhile?
These premiums could occur when the euro's 30-day interest rate is above-Select-abovebelowItem 1 the U.S. 30-day interest rate, and the euro's 90-day interest rate is below-Select-abovebelowItem 2 the U.S. 90-day interest rate. This does not ensure-Select-does not ensureensuresItem 3 that covered interest arbitrage is worthwhile.
Spot rate of Mexican peso$0.092 180-day forward rate of Mexican peso$0.088 180-day Mexican interest rate6% 180-day U.S. interest rate4% Given this information, is covered interest arbitrage worthwhile for Mexican investors who have pesos to invest? Explain your answer. Do not round intermediate calculations. Round your answer to one decimal place
To answer this question, begin with an assumed amount of pesos and determine the yield to Mexican investors who attempt covered interest arbitrage. Using MXP1,000,000 as the initial investment: MXP1,000,000 × $0.092 = $92,000 × (1.04) = $95,680/$0.088 = MXP1,087,273 Mexican investors would generate a yield of about 8.7% ([MXP1,087,273 - MXP1,000,000]/MXP1,000,000), which exceeds their domestic yield. Thus, it is worthwhile for them.
The one-year interest rate in New Zealand is 7 percent. The one-year U.S. interest rate is 12 percent. The spot rate of the New Zealand dollar (NZ$) is $0.50. The forward rate of the New Zealand dollar is $0.53. Is covered interest arbitrage feasible for U.S. investors? Explain. Do not round intermediate calculations. Round your answer to two decimal places.
To determine the yield from covered interest arbitrage by U.S. investors, start with an assumed initial investment, such as $1,000,000. $1,000,000/$0.50 = NZ$2,000,000 × (1.07)= NZ$2,140,000 × $0.53 = $1,134,200Yield = ($1,134,200 - $1,000,000)/$1,000,000 = 13.42%
Assume that the annual U.S. interest rate is currently 6 percent and Germany's annual interest rate is currently 8 percent. The spot rate of the euro is $1.10 and the one-year forward rate of the euro is $1.10. Assume that as covered interest arbitrage occurs, the interest rates are not affected, and the spot rate is not affected. Explain how the one-year forward rate of the euro will change in order to restore interest rate parity, and why it will change. Your explanation should specify which type of investor (German or U.S.) would be engaging in covered interest arbitrage, whether they are buying or selling euros forward, and how that affects the forward rate of the euro.
U.S. investors will engage in covered interest arbitrage, which involves forward sales of euros, and will place downward pressure on the one-year forward rate.
Which of the following best describes covered interest arbitrage?
Using forward contracts to mitigate exchange rate risk, while attempting to capitalize on higher interest rates in a particular country.Covered interest arbitrage is the process of using forward contracts to lock in a future exchange rate in order to mitigate exchange rate risk, while attempting to capitalize on differing interest rates between two countries. The "interest arbitrage" part of this name comes from the fact that the process involves trying to profit from a higher interest rate in one country relative to another. The "covered" part of the name comes from the use of forward contracts to "cover" your position, hedging against unforeseen changes in the exchange rate.
Sailbridge Signbit Bid Ask Bid Ask British pound$1.26$1.30$1.30$1.3
You cannot profit from locational arbitrage in this situation. To profit from locational arbitrage, there must a location with a bid price that is higher than the ask price at another location. Such an opportunity would allow you to purchase the currency at the cheaper (ask) price and sell it at the higher (bid) price.
Value of Canadian dollar in U.S. dollars$0.90 Value of New Zealand dollar in U.S. dollars$0.30 Value of Canadian dollar in New Zealand dollarsNZ$3.04 Explain the steps that would reflect triangular arbitrage.
[$3,000,000/$0.90 = C$3,333,333 × NZ$3.04 = NZ$10,133,333 × $0.30 = $3,040,000] Explain the steps that would reflect triangular arbitrage. One could obtain Canadian dollars with U.S. dollars, sell the Canadian dollars for New Zealand dollars and then exchange New Zealand dollars for U.S. dollars.
Assume that interest rate parity exists. You expect that the one-year nominal interest rate in the United States is 8 percent, while the one-year nominal interest rate in Australia is 12 percent. The spot rate of the Australian dollar is $0.51. You will need 9 million Australian dollars in one year. Today, you purchase a one-year forward contract in Australian dollars. How many U.S. dollars will you need in one year to fulfill your forward contract? Do not round intermediate calculations. Round your answer to the nearest dollar.
[(1.08)/(1.12)] - 1 = -3.57%. So the one-year forward rate is $0.51 × [1 + (-0.0357)] = $0.4918. You will need 9,000,000 × $0.4918 = $4,426,071.
American Bank quotes a bid rate of $0.026 and an ask rate of $0.028 for the Indian rupee (INR); National Bank quotes a bid rate of $0.024 and an ask rate for $0.025. Locational arbitrage would involve
a. buying rupees from National Bank at the ask rate and selling them to American Bank at the bid rate. b. Locational arbitrage is not possible in this case. c. buying rupees from American Bank at the ask rate and selling to National Bank at the bid rate. d. buying rupees from American Bank at the bid rate and selling them to National Bank at the ask rate. e. buying rupees from National Bank at the bid rate and selling them to American Bank at the ask rate. (asw) A
us investors have 1 million dollars to invest 1-year deposited rate offered to us investors= 10% 1 year deposited rate offered on Singapore dollars=12% 1-year forwar rate of signapore dollars= $.412 spot rate of Singapore dollar= $.4
a. interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically. b. interest rate parity exists and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically. c. interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically. d. interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically. (asw) c
Assume the following exchange rates: $1 = NZ$3, NZ$1 = MXP2, and $1 = MXP7. Given this information, as you and others perform triangular arbitrage, the exchange rate of the New Zealand dollar (NZ) with respect to the Mexican peso (MXP) should ____, and the exchange rate of the Mexican peso (MXP) with respect to the U.S. dollar should ____.
appreciate;appreciate
Suppose that the six-month interest rate in the United States is 4%, while the six-month interest rate in Mexico is 8%. Further, assume the spot rate of the peso is $0.40. Given the spot rate of $0.40 of the peso, as well as the premium of -3.7037% that you calculated previously, the six month forward rate of peso should be about
f= s * (1+p) F=$0.40×(1+(−0.037))=$0.38519F=$0.40×1+−0.037=$0.38519.
Assume that interest rate parity exists and will continue to exist. The U.S. interest rate was 4% while the Singapore interest rate was 5% at the beginning of the month. Assume the Singapore interest rate rises while the U.S. interest rate declines over the month. Based on this information, the forward rate of the Singapore dollar exhibited a______ at the beginning of the month, and _______by the end of the month.
discount; the size of the discount increased
Assume that interest rate parity does not hold, and Japanese investors are benefiting from covered interest arbitrage due to high interest rates in the U.S. Which of the following forces should result from this covered interest arbitrage activity?
downward pressure on the yens spot rate
Due to ____, market forces should realign the spot rate of a currency among banks.
locational arbitrage
Biscayne Co. will be receiving Mexican pesos today and will need to convert them into Australian dollars. Today, a U.S. dollar can be exchanged for 9 Mexican pesos. An Australian dollar is worth one-half of a U.S. dollar. What is the spot rate of a Mexican peso in Australian dollars? Round your answer to the nearest cent.
peso = $0.11A$ = $0.50peso/A$ = $0.11/$0.50 = A$0.22
Assume that the interest rate in the home country of Currency X is much lower than the U.S. interest rate. According to interest rate parity, the forward rate of Currency X
should exhibit a premium
According to interest rate parity (IRP)
the forward rate differs from the spot rate by a sufficient amount to offset the interest rate differential between two currencies.
