Question

Assume that the interest rate on a one-year treasury bill is 3% and that of a one year Eurobond is 1.5%. Also assume that CIP holds in the Forex. If the spot exchange rate is $1.0832 and the forward exchange rate is 1.1075 where will investors invest their money? Also compute the covered interest differential.

Answer #1

3. Assume that the interest rate on a one-year treasury bill is
3% and that of a one year Eurobond is 1.5%. Also assume that CIP
holds in the Forex. If the spot exchange rate is $1.0832 and the
forward exchange rate is 1.1075 where will investors invest their
money? Also compute the covered interest differential.

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...

Suppose that the interest rate on the 6 months
Treasury bill is 10% in Lusaka and 12%
newyork and the spot rate is K18.66/$.
(a) How can a Zambian investor undertake uncovered interest
arbitrage
(b) ) How can the Zambian investor who has K500, 000 undertake
covered interest
arbitrage if the dollar is at three month forward premium of 1%
(per year)? How
much would the Zambian investor earn on his foreign investment?

Suppose that the interest rate on a one-year Treasury bill is
currently 7% and that investors expect that the interest rates on
one-year Treasury bills over the next three years will be 8%, 9%,
and 7%. Use the expectations theory to calculate the current
interest rates on two-year, three-year, and four-year Treasury
notes. The current interest rate on two-year Treasury notes
is______%.
(Round your response to two decimal places.)The
current interest rate on three-year Treasury notes is
______%.
(Round your...

Covered Interest Arbitrage. Assume the following information: •
British pound spot rate = $1.65. • British pound one-year forward
rate = $1.65 • British one-year interest rate = 12 %. • U.S.
one-year interest rate = 10 %. Explain how U.S. investors could use
covered interest arbitrage to lock in a higher yield than 9
percent. What would be their yield? Explain how the spot and
forward rates of the pound would change as covered interest
arbitrage occurs.

Suppose that you are told that the interest rate on a US
government bond is 3 percent compared to a 2 percent interest rate
on a comparable German bond (i.e. equal risk and maturity). a)
Assuming that uncovered interest parity holds (so that investors
are currently indifferent between the two assets), what would this
imply about the market's expectation of the future value of the
dollar in the exchange market? Explain. (10 points) b) Suppose that
the current spot rate...

Currently the spot exchange rate is $1.33/£ and the one year
forward exchange rate is $1.32/£. The yearly interest rate is 1% in
US and 3% in U.K. Assume you can borrow as much as $1,330,000.
a. Is interest rate parity
currently (IRP) holding?
b. If IRP is not holding, how
would you execute a covered interest arbitrage? Show all the steps
what you are going to do today and in one year. Also determine the
arbitrage profit.
c. Explain how IRP will...

Question 1
(a) Assume the following information:
Spot rate of £ = $1.60
180-day forward rate of £ = $1.59
180-day British interest rate = 4%
180-day U.S. interest rate = 3%
Based on this information, is covered interest arbitrage by U.S.
investors feasible (assuming that U.S. investors use their own
funds ($1 million))? Explain.
(b) Covered Interest Arbitrage in Both Directions. The one-year
interest rate in New Zealand is 6 percent. The one-year U.S.
interest rate is 10 percent....

Assume the following information:
1- Mexican one-year interest rate =11%
2- U.S one-year interest rate = 4%
3- Peso spot rate = 0.13 $/p
4- Peso forward rate = 0.07 $/p
if interest rate parity exists, how much money you can make per
each unit. For example, if one can make $0.0303 per peso, type
0.0303 in the box below.

On the Forex market, you observe the following
hypothetical quotes:
Spot rate: £:$ = 1.2375
One-year interest rate in the US = 0.50%
One-year interest rate in UK = 0.25%.
What should be the quote for the one-year forward
exchange rate of $:£?
A.
1.2344
B.
0.8061
C.
1.2406
D.
0.8101

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