Question

For this question you should assume that there are four economies – the U.S, the U.K, Canada and Europe. The U.S is the home economy. You are given the following information. The U.S interest rate is 0.08.

Interest Rate Spot Exchange rate Forward rate

U.K 0.05 1.0

Canada 0.15 2.0

Europe 0.5

- What is the spot exchange rate between the U.K and Canada where the U.K is the home country?

b. What is the expected return for a U.S investor investing in Europe?

c. Suppose that inflation in the U.S will be three percent. What is inflation in Canada?

d. What is the real interest rate in Europe

Answer #1

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Due to the integrated nature of their capital markets, investors
in both the U.S. and U.K. require the same real interest rate,
2.5%, on their lending. There is a consensus in capital markets
that the annual inflation rate is likely to be 3% in the U.S. and
2% in the U.K. for next year. The spot exchange rate is currently
E$/£ = 1.4.
a. Compute the nominal interest rate per annum in both the U.S.
and U.K., assuming that the...

Consider the following information for the U.K. and the U.S:
U.K. inflation rate (annual) 3.56%
U.S. inflation rate 1.95%
GBP/USD spot rate 1.3079
6-month GBP Eurodollar deposit rate 0.9131%
6-month USD Eurodollar deposit rate 2.83%
Sept. futures rate on the CBOE 1.3234
Premium for a Sept 1.32 call 0.05
Premium for a Sept 1.32 put 0.06
a. What do you expect will be the GBP/USD exchange rate in
6-months?
b. Suppose you will receive 100,000 GBP in 6-months. Should you...

1. You observe that one U.S. dollar is currently equal to 3.6
Brazilian reals in the spot market. The one year US
interest rate is 7% and the one year Brazilian interest rate is 4%.
One year later, you observe that one U.S. dollar is now equal to
3.2 Brazilian reals in the spot market. You would have made a
profit if you had:
Borrowed U.S. dollars and invested in U.S. dollars
Borrowed Brazilian reals and invested in Brazilian reals
Borrowed...

1. Suppose the annual interest rate is 3.5% in U.S. and 4.5% in
U.K., and that the spot exchange rate is S($/£) = 1.3918 and the
forward exchange rate with 12-month maturity is F12($/£)
= 1.3526. Assume you are a U.S. trader and can borrow up to
$1,000,000 (or £1,000,000). Answer the following questions.
a. Is there an arbitrage opportunity according to the Interest
Rate Parity based on the above information? (show your work!)
b. Show the strategy to capture...

The spot rate between the U.K. and the U.S. is £.7559/$, while
the one-year forward rate is £.7529/$. The risk-free rate in the
U.K. is 4.37 percent and risk-free rate in the United States is
2.63 percent. How much in profit can you earn on $5,500 utilizing
covered interest arbitrage?

24.
Assume the spot exchange rate is £.6229. The expected inflation
rate in the U.K. is 3.8 percent and in the U.S. it is 2.9 percent.
What is the expected exchange rate three years from now if relative
purchasing power parity exists?
£.5391
£.6062
£.6399
£.6285
£.6233

The spot rate between the U.K. and the U.S. is £.7544/$, while
the one-year forward rate is £.7526/$. The risk-free rate in the
U.K. is 4.31 percent and risk-free rate in the United States is
2.60 percent. How much in profit can you earn on $6,500 utilizing
covered interest arbitrage?
Multiple Choice
$106.84
$127.37
$94.97
$111.45
$101.89

If the U.S. inflation is 5% and the U.K. inflation is
3%, what can you infer from relative purchasing power parity
(relative PPP) about the change in the exchange rate between the
U.S. dollar and the British pound?
a. the pound depreciates against the
dollar by 2%.
b. the pound appreciates against the
dollar by 2%.
c. there is no change in the exchange
rate between the dollar and the pound.
d. the pound depreciates against the
dollar by 8%.

QUESTION 13
Assume the inflation rate in the U.S. is 0.91 percent. The spot
rate for a foreign currency is 1.4231 while the 1-year forward rate
is 1.4375. What is the approximate rate of inflation in the foreign
country?
a
2.15%
b
2.03%
c
1.92%
d
1.80%
e
1.71%

A Japanese investor can earn a 4.25% interest rate in Japan or
3.75% in the U.S. The spot exchange rate is 105 yen to the dollar.
At what forward rate would an investor be indifferent between the
U.S. and Japanese investments? What would you do if the forward was
for fewer yen per dollar than the indifference rate calculated in
(A)?

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