Question

The following rates exist:

Current spot exchange rate: $1.80/£

Annualized interest rate on 90-day dollar-denominated bonds: 8% (2% for 90 days)

Annualized interest rate on 90-day pound-denominated bonds: 12% (3% for 90 days)

Financial investors expect the spot exchange rate to be $1.77/£ in 90 days.

**Calculate the expected premium or discount on the
pound**

**What would you expect the 90-day expected spot exchange
rate to be under uncovered interest rate parity conditions using
the approximate UIRP (i.e., the investor is indifferent between
investing in London or New York)?**

Answer #1

a) If the US investor invests in Dollar denominated bonds, he gets a return of 2% on them for 90 days

If US investors invest in Pound then their return in 90 days equals 1.77*3%/1.80 = 2.95%

So for US investor it is better to invest in pound

b) For UK investor he gets a return of 3% in UK

If he invests in US then he gets a return of 1.8*2%/1.77 = 2.03%

So he is better off investing in UK

C) There will be large scale inflows into UK which would lead to dollar depreciation and appreciation for Pound

The following rates exist: Current spot exchange rate: $1.80/£
Annualized interest rate on 90-day dollar-denominated bonds: 8% (2%
for 90 days) Annualized interest rate on 90-day pound-denominated
bonds: 12% (3% for 90 days) Financial investors expect the spot
exchange rate to be $1.77/£ in 90 days.
a. If he bases his decisions solely on the difference in the
expected rate of return, should a U.S.-based investor make an
uncovered investment in pound-denominated bonds rather than
investing in dollar-denominated bonds?

The spot rate on the London market is £0.5525/$, while the
90-day forward rate is £0.5587/$. What is the annualized forward
premium or discount on the British pound? (Round answer
to 2 decimal places, e.g. 17.54%. Use 360 days for
calculation.)

The following is market information:
Current spot rate of pound
=
$1.45
90-day forward rate of pound
=
$1.46
3-month deposit rate in U.S.
=
1.1%
3-month deposit rate in Great Britain
=
1.3%
If you have $250,000 and use covered interest arbitrage for a
90-day investment, what will be the amount of U.S. dollars you will
have after 90 days?

3) Suppose that the spot exchange rate S(¥/€) between the yen
and the euro is currently
¥110/€, the 1-year euro interest rate is 6% p.a., and the 1-year
yen interest rate is 3% p.a.
Which of the following statements is MOST likely to be true?
A. The high interest rate currency must sell at a forward premium
when priced in the low
interest rate currency to prevent covered interest arbitrage
Page 3 of 13
B. Real interest parity does not...

Assume the following information:
Quoted Price
Spot rate of Singapore dollar
$.75
90?day forward rate of Singapore dollar
$.74
90?day Singapore interest rate
4.5%
90?day U.S. interest rate
2.5%
Given this information, what would be the yield (percentage
return) to a U.S. investor who used covered interest arbitrage?
(Assume the investor invests $1,000,000.)
What market forces would occur to eliminate any further
possibilities of covered interest arbitrage?

(6)Consider the following information:
90-day US interest
rate………………………………...2.5%
90-day UK interest rate
……………………………....3.0%
90-day forward rate for the
pound…………………...$1.50
Spot rate for the
pound……………………………….$1.52
(a)Assume that CSI company based in the US will receive
1,000,000 pounds in 90 days, would it be better off using the
forward hedge or money market hedge? Substantiate your answer with
appropriate quantitative evidence.
(b)Assume that the same CSI company will need 1000,000
pounds in 90 days and wishes to...

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?

Assume the following information:
U.S. investors have $1,000,000 to invest:
1-year deposit rate offered on U.S.
dollars =12%
1-year deposit rate offered on Singapore
dollars =10%
1-year forward rate of Singapore
dollars =$.412
Spot rate of Singapore
dollar =$.400
Then:
interest rate parity exists and covered interest arbitrage by
U.S. investors results in the same yield as investing
domestically.
interest rate parity doesn't exist and covered interest
arbitrage by U.S. investors results in a yield above what is
possible domestically.
interest rate parity exists...

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