Question

S=$/£0.75 ; 1yr bond rate in UK=5% ; 1yr F=$/£0.77; 1Yr bond rate US=2% A) calculate...

S=$/£0.75 ; 1yr bond rate in UK=5% ; 1yr F=$/£0.77; 1Yr bond rate US=2%

A) calculate the return on 1$ invested in the UK, where will global investors choose to invest ?

B) find the spot ratw that makes the return on investments equal across these 2 countries

Homework Answers

Answer #1

Ans.

a) $1 when exchanged for £ at spot rate S = £0.75

£0.75's value after 1 year in UK = 0.75*(1+0.05) = £0.7875

£7875 when exchanged for $ at F = 0.7875/0.77 = 1.02272

Thus, $1 becomes $1.02272 after investing in UK. So, rate of return is 2.2272% per annum.

b) From uncovered interest rate parity condition,

F/S = (1+interest in UK)/(1+interest in US)

=> 0.77/S = (1+0.05)/(1+0.02)

=> S = £0.748/$

Thus, present spot price = $/£0.748

* Please don’t forget to hit the thumbs up button, if you find the answer helpful.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
1a) The spot exchange rate is $0.75 US/CAD. The U.S. interest rate is 2%, the interest...
1a) The spot exchange rate is $0.75 US/CAD. The U.S. interest rate is 2%, the interest rate in Canada is 3%. A futures contract on 1,000,000 CAD, with one year to delivery, settles at 0.77 US/CAD. Calculate the amount of U.S. dollars that you need for the arbitrage strategy. Borrow $978,874 U.S. Borrow $728,155 U.S. Invest $978,874 U.S. Invest $728,155 U.S. 1b) A futures contract on S&P 500 with the maturity 3 months has settled at 2,510 today. The underlying...
2. Suppose that you are told that the interest rate on a US government bond is...
2. 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...
1.What is the correct way to annualize an interest rate in financial decisions? 2.John is watching...
1.What is the correct way to annualize an interest rate in financial decisions? 2.John is watching an old game show on rerun television called Let’s Make a Deal in which you have to choose a prize behind one of two curtains. Behind one of the curtains is a gag prize worth $ 150, and behind the other is a round-the-world trip worth $7,200. The game show has placed a subliminal message on the curtain containing the gag prize, which makes...
1. A Treasury bond has a 10% annual coupon and a 10.5% yield to maturity. Which...
1. A Treasury bond has a 10% annual coupon and a 10.5% yield to maturity. Which of the following statements is CORRECT? * a. The bond sells at a price below par. b. The bond has a current yield less than 10%. c. The bond sells at a discount. d. a & c. e. None of the above 2. J&J Company's bonds mature in 10 years, have a par value of $1,000, and make an annual coupon interest payment of...
Holding period and annual? (investment) returns. Baker Baseball? Cards, Inc. originally purchased the rookie card of?...
Holding period and annual? (investment) returns. Baker Baseball? Cards, Inc. originally purchased the rookie card of? Hammerin' Hank Aaron for $ 33.00. After holding the card for 4 years, Baker Baseball Cards auctioned the card for $132.00. What are the holding period return and the simple annual return on this? investment? Investment Original Cost of Investment Selling Price of Investment Distributions Received Percent Return + + ??CD ? $500 ?$540 ?$0 ?? ??Stock ?$23 ?$34 ?$2 ?? ??Bond ?$1,040 ?$980...
John and Marsha on Portfolio Selection The scene: John and Marsha hold hands in a cozy...
John and Marsha on Portfolio Selection The scene: John and Marsha hold hands in a cozy French restaurant in downtown Manhattan, several years before the mini-case in Chapter 9. Marsha is a futures-market trader. John manages a $125 million common-stock portfolio for a large pension fund. They have just ordered tournedos financiere for the main course and flan financiere for dessert. John reads the financial pages of The Wall Street Journal by candlelight. John: Wow! Potato futures hit their daily...
Gender Bias in the Executive Suite Worldwide The Grant Thornton International Business Report (IBR) has described...
Gender Bias in the Executive Suite Worldwide The Grant Thornton International Business Report (IBR) has described itself as "a quarterly survey of business leaders from across the globe … surveying 11,500 businesses in 40 economies across the globe on an annual basis." 1 According to the 2011 IBR, the Asia Pacific region had a higher percentage (27 percent) of female chief executive officers (CEOs) than Europe and North America. Japan is the only Asia Pacific region exception. The report further...
provide 3-4 paragraphs post (team 2) 1-What are 4 key things you learned about the topic...
provide 3-4 paragraphs post (team 2) 1-What are 4 key things you learned about the topic from reading their paper? 2-How does the topic relate to you and your current or past job? 3-Critique the paper in terms of the organization and quality.1- Employee Stress and how it has an Adverse Effect on a Company This paper explores employee stress and how it has an adverse effect on a company, its employees and the organization. Job stress can have a...
Delta airlines case study Global strategy. Describe the current global strategy and provide evidence about how...
Delta airlines case study Global strategy. Describe the current global strategy and provide evidence about how the firms resources incompetencies support the given pressures regarding costs and local responsiveness. Describe entry modes have they usually used, and whether they are appropriate for the given strategy. Any key issues in their global strategy? casestudy: Atlanta, June 17, 2014. Sea of Delta employees and their families swarmed between food trucks, amusement park booths, and entertainment venues that were scattered throughout what would...
Using the model proposed by Lafley and Charan, analyze how Apigee was able to drive innovation....
Using the model proposed by Lafley and Charan, analyze how Apigee was able to drive innovation. case:    W17400 APIGEE: PEOPLE MANAGEMENT PRACTICES AND THE CHALLENGE OF GROWTH Ranjeet Nambudiri, S. Ramnarayan, and Catherine Xavier wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT