Question

Suppose you have $100,000 to place in a bank deposit in either the United States of Great Britain. The annual interest rate on bank deposits in the United States is = 6% and in Britain is is = 8.5%. The spot US dollar/British pound exchange rate is = 1.9421 and the one-year forward rate is = 1.9933. Answer the following questions using the exact equation for covered interest parity (CIP), a. if you deposit your money in the US, after one year, your investment will be worth_______. b. if you convert to pounds and deposit your money in Britain, after one year, your pound-denominated investment will be worth________, Then, converted back to dollars, it will be worth _____________, c. This analysis suggests that:

Answer #1

a) If the Money is deposited in the US, after one year, the investment will be worth $106,000.

b) The pound-denominated investment will be worth 55867.35 pounds. When converted back to the dollar it will be worth $111360.4.

c) The analysis suggests that it will be profitable to invest in Britain.

Calculations:

Converting dollar into pound 100,000 / 1.9421. = 51490.65

Calculating interest rates = (51,490 x 8.5 x 1) / 1000= 4376.70.

Total amount = 51490.65 + 4376.70 = 55867.35

COnverting back to dolar = 55867.35 X 1.9933

Consider a Canadian investor with C$1,000 (Canadian dollar) to
place in a bank deposit in either US or Canada. The (one-year)
interest rate on bank deposits is 2% in US and 4% in Canada. The
(one-year) forward US dollar ($) – Canadian dollar (C$) exchange
rate is 1.4 C$ per $ and the spot rate is 1.3 C$ per $. Answer the
following questions, using the exact equations for UIP and CIP as
necessary.
a. What is the C$-denominated return...

Suppose the spot exchange rate between the United States and the
United Kingdom is $1.73/£. The continuously compounded interest
rate in the U.S. is 8%, while the continuously compounded British
pound-denominated interest rate is 3%. Suppose you observe a 9
-month forward exchange rate of $1.99/£. What
transactions could you undertake to make money with zero initial
investment and no risk? Please work and show work. Thank you.

You are planning to deposit $100,000 into a bank account and to
leave the funds on deposit for 12 years. Bank A pays interest at a
rate of 3%, compounded annually. Bank B pays interest at a rate of
2.5%, compounded semiannually. Bank C pays interest at a rate of
2.2% compounded daily.
If you put your money into Bank A, how much will you have in
the account after the 12 years?
If you put your money into Bank...

Let's suppose you have $1.5 million to invest. You are
considering to invest in UK first, then convert the British Pound
back to US$ in the future.
You know the following information:
Annual Interest rate on investment in US: 0.2%
Annual Interest rate on investment in UK: 1.5%
Investment period: 1 year
Current exchange rate: 1.65 $/BP
The forward exchange rate which you can apply when converting BP
to US$: 1.63 $/BP In this case, what would be profit through...

Let's suppose you have $1 million to invest.
You are considering to invest in UK first, then convert the
British Pound back to US$ in the future.
You know the following information:
The annual Interest rate on investment in UK: 4%
Investment period: 1 year
Current exchange rate: 1.48 $/BP
Forward exchange rate which you can apply when converting BP to
US$: 1.47 $/BP
What would be profit if you apply the covered-interest
arbitrage?
A) About $40,542
B) None of...

Suppose that you have $1 to invest. You have two investment
options: one is to buy 1-year U.S. bonds that offer a market
interest rate of 8% per year, and the other is to buy 1-year
Japanese bonds that pay 12% interest per year. Assume that you
decide to buy the Japanese bonds with $1 and that you enter into a
1-year forward contract to protect your investment from possible
fluctuations in the exchange rate. The forward contract involves
the...

BL lives in the US and has $800,000 surplus funds that he wants
to invest for one year in any currency. He receives the following
quotes from a commercial bank:
Spot rate= 1 British Pound: $50-55
One-year forward rate= 1 British Pound: $58-64
One-year US interest rate= 6%
One year UK interest rate= 1%
(i) With supporting calculations, advise BL whether covered
interest arbitrage is worthwhile.
(ii) Would your advice differ, if transaction costs in respect
of the covered interest...

Assume the following information:
You have $1,500,000 to invest.
Current spot rate of pound = $1.61.
90-day forward rate of pound = $1.57.
3-month deposit rate in U.S. = 2.39%.
3-month deposit rate in U.K. = 5%.
Does the covered interest parity hold? If you use covered
interest arbitrage for a 90-day investment, what will be the amount
of U.S. dollars you will have after 90 days?

You have some money on deposit in a bank account which pays a
nominal APR (or quoted) rate of 8.0944 percent, but with interest
compounded daily (using a 365 day year). Your friend owns a
security which calls for the payment of $10,000 after 27 months.
Your friend's security is just as safe as your bank deposit, and
your friend offers to sell it to you for $8,000 today. If you buy
the security, by how much will the effective...

Chris wants to deposit $100 in a bank for two years. He can
either 1) leave the money for two years and earn an annual rate of
11% or 2) deposit money for one year and earn annual interest rate
of 10%, then come back to the bank and re-deposit the original
investment plus earned interest for another year. What value of
one-year interest rate one year from now would yield the very same
outcome for Chris if he chooses...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 2 minutes ago

asked 12 minutes ago

asked 15 minutes ago

asked 18 minutes ago

asked 19 minutes ago

asked 21 minutes ago

asked 22 minutes ago

asked 56 minutes ago

asked 57 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago