Question

a. Assuming that interest rate parity exists, do you think hedging with a forward rate would be beneficial if the spot rate of the Mexican peso was expected to decline slightly over time?

Answer #1

Yes, because if you hedge with a forward rate you may benefit as it is always beneficial to invest at higher interest rates in order to gain more profit. Also, lower interest rates are not attractive and thus reduces the value of the currency. As mentioned, if spot rates are expected to decline, it would be better to opt for forward rate.

Forward rate is a rate at which transaction would be carried out on a future date.

Spot rate is a rate which is determined on the spot date and carried out in two working days usually.

Assume the following information: - Mexican one - year interest
rate = 6% - U.S . one- year interest rate = 3% - Peso spot rate =
0.11 $/p - peso forward rate = 0.08 $/p interest rate parity
exists, how do you take advantage of this opportunity ? explain
please.

If you are a U.S. importer of Mexican goods and you believe
that today’s forward rate of the peso is a very accurate estimate
of the future spot rate, do you think Mexican peso call options
would be a more appropriate hedge than the forward hedge?
Explain.

Assume the following information:
♦ Mexican one-year interest rate = 9 %
♦ U.S. one-year interest rate = 4 %
♦ Peso spot rate = 0.11 $/p
♦ Peso forward rate = 0.08 $/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

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.

You believe that IRP presently exists. The nominal annual
interest rate in Mexico is 14%. The nominal annual interest rate in
the U.S. is 3%. You expect that annual inflation will be about 4%
in Mexico and 5% in the U.S. The spot rate of the Mexican peso is
$.10. Put options on pesos are available with a one-year expiration
date, an exercise price of $.105, and a premium of $0.014 per unit.
You will receive 1 million pesos in...

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....

3. You believe that IRP presently exists. The nominal annual
interest rate in Mexico is 14%. The nominal annual interest rate in
the U.S. is 3%. You expect that annual inflation will be about 4%
in Mexico and 5% in the U.S. The spot rate of the Mexican peso is
$.10. Put options on pesos are available with a one-year expiration
date, an exercise price of $.108, and a premium of $0.01 per unit.
You will receive 12 million pesos...

Assume that Calumet Co. will receive 10 million pesos in 15
months. It does not have a relationship with a bank at this time,
and therefore cannot obtain a forward contract to hedge its
receivables at this time. However, in three months, it will be able
to obtain a one-year (12-month) forward contract to hedge its
receivables. Today the three-month U.S. interest rate is 3% (not
annualized), the 12-month U.S. interest rate is 8%, the three-month
Mexican peso interest rate...

Assume there exists a forward foreign exchange market in Ghana
and this market has the based on the information characteristics
below. Assuming there is interest rate parity; calculate UK 90-day
interest rate per annum based on the information below.
90 day interest rates (Ghana) …….13% p.a
90 day interest rates (UK) ………….? p.a
Spot rate…………………………..GHS 6.1000/£
90 day forward rate………………..GHS 6.1200/£
Assume that the Nigerian Naira exhibits a 6-month interest rate of
12 percent p.a while the U.S. dollar exhibits...

(Uncovered interest parity) What is the relationship among the
forward exchange rate, the spot exchange rate, and the interest
rate? Suppose the (1-year) interest rate on bank deposits is 2% in
Canada and 1.5% in United States. If the (1-year) forward US$–C$
exchange rate is C$1.5 per US$ and the spot rate is C$1.2 per US$,
what is the expected US$–C$ exchange rate one year ahead?

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