Question

Assume that the U.S. one-year interest rate is 5 percent and the one-year interest rate on...

Assume that the U.S. one-year interest rate is 5 percent and the one-year interest rate on euros is 7 percent. You have $100,000 to invest and you believe that the international Fisher effect (IFE) holds. The euro's spot exchange rate is $1.20. What will be the yield on your investment if you invest in euros (please use 4 decimal points)? *Since you believe that IFE holds, you can find the forward rate (or the spot rate in the future) based on the IFE equation.

a. 3.5%

b. 4%

c. 5%

d. 2

Business   Accounting   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1
1] Forward rate per IFE = 1.20*1.05/1.07 = 1.1776
2] Amount to be invested in euros = 100000/1.2 = €            83,333.3333
3] Amount in euros after 1 year = 83333.33*1.07 = €            89,166.6631
4] Amount in $ after conversion at forward rate per IFE = 89166.6631*1.1776 = €         1,05,002.6625
5] Yield = 105002.6625/100000-1 = 5.00%
Answer: [c] 5.00%
0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Current one-year interest rates in Europe is 2 percent, while one-year interest rates in the U.S....
Current one-year interest rates in Europe is 2 percent, while one-year interest rates in the U.S. is 1.5 percent. You convert $100,000 to euros and invests them in France. One year later, you convert the euros back to dollars. The current spot rate of the euro is $1.28. a. According to the IFE, what should the spot rate of the euro in one year be? b. If the spot rate of the euro in one year is $1.20, what is...
Suppose the U.S. dollar interest rate is 5% and the euro interest rate is 6%. Assume...
Suppose the U.S. dollar interest rate is 5% and the euro interest rate is 6%. Assume no transaction costs, fees, or commissions. In all markets, the spot rate for euros is $1.25. You believe in one year's time the spot rate for euros will be $1.30. An investor would like to invest $100,000 for one year and is willing to take on risk for a higher return. a. How would you advise him? (Provide Numerical Support)(8 points)
assume that the one year interest rate in the united states is 7 percent and in...
assume that the one year interest rate in the united states is 7 percent and in the united kingdom 5 percent according to the international fisher effect the British pounds spot exchange rate should ____ by about _____ over the year.
The U.S nominal annual rate of interest is 5% and the Malaysian annual nominal rate of...
The U.S nominal annual rate of interest is 5% and the Malaysian annual nominal rate of interest on the Ringgit is 13%. At the same time, the spot exchange rate is 3 MYR per USD and the real rate is 2% in both the US and Malaysia. What is the one year forecast of the MYR per USD spot exchange rate, assuming the International Fisher effect holds? Describe the potential problem with your forecast in part A. If you determined...
Answer based on the following: Interest rate on U.S. assets = 5%, interest rate on European...
Answer based on the following: Interest rate on U.S. assets = 5%, interest rate on European assets = 12%, the spot rate of exchange = 0.90 Euros/$, the one year forward rate of exchange = 0.95 EUROS/$. The U.S citizen should hold which asset? 1) The Euro asset 2) The Dollar asset
Answer based on the following: Interest rate on U.S. assets = 5%, interest rate on European...
Answer based on the following: Interest rate on U.S. assets = 5%, interest rate on European assets = 12%, the spot rate of exchange = 0.90 Euros/$, the one year forward rate of exchange = 0.95 EUROS/$. The expected rate of return on foreign assets (Dollar assets) for the European citizen is, 1) 6.9% 2) 6.44 3)10.56% 4) 12% 5) 5%
1. You observe that one U.S. dollar is currently equal to 3.6 Brazilian reals in the...
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...
Suppose that the annual interest rate is 2.47 percent in the United States and 4.25 percent...
Suppose that the annual interest rate is 2.47 percent in the United States and 4.25 percent in Germany, and that the spot exchange rate is $1.60/€ and the forward exchange rate, with one-year maturity, is $1.58/€. Assume that an arbitrager can borrow up to $2,750,000 or €1,718,750. If an astute trader finds an arbitrage, what is the net profit in one year? -------------------------------------------------------------------- An Italian currency dealer has good credit and can borrow €937,500 for one year. The one-year interest...
The interest rate in the U.K. is 3%, while the interest rate in the U.S. is...
The interest rate in the U.K. is 3%, while the interest rate in the U.S. is 5%. The spot rate for the British pound is $1.50. According to the international Fisher effect (IFE), the British pound should adjust to a new level of: $1.47. $1.53. $1.43. $1.57.
Currently, interest rate is 2 percent per annum in the U.S. and 6 percent per annum...
Currently, interest rate is 2 percent per annum in the U.S. and 6 percent per annum in the euro zone, respectively. The spot exchange rate is $1.25 = €1.00, and the one-year forward exchange rate is $1.20 = €1.00. As informed traders recognize the deviation from IRP and start carrying out covered interest arbitrage transactions to earn a certain profit, how will IRP be restored as a result? A. Interest rate in the euro zone will rise; interest rate in...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT