Question

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. The spot rate of the New Zealand dollar (NZ$) is $0.50. The forward rate of the New Zealand dollar is $0.54. Is covered interest arbitrage feasible for U.S. investors? Is it feasible for New Zealand investors? In each case, explain why covered interest arbitrage is or is not feasible.

(c) Assume that annual interest rates in the United States are 4
percent, while interest rates in France are 6 percent.

(i) According to IRP, what should the forward rate premium or
discount of the euro be?

(ii). If the euro’s spot rate is $1.10, what should the one-year
forward rate of the euro be?

(d) The one-year risk-free interest rate in Mexico is 10%. The
one-year risk-free rate in the U.S. is 2%. Assume that interest
rate parity exists. The spot rate of the Mexican peso is
$.14.

Based on the international Fisher effect, what is the expected
change in the spot rate over the next year?

Question 2

(a) The one-year risk-free interest rate in Mexico is 10 percent.
The one-year risk-free rate in the United States is 2 percent.
Assume that interest rate parity exists. The spot rate of the
Mexican peso is $.14.

(i). What is the forward rate premium?

(ii). What is the one-year forward rate of the peso?

Answer #1

a) As per Interest rate parity

Theoretical Forward rate = Spot rate * (1+ US interest rate ) /(1+ British interest rate )

= 1.6* (1+0.03)/(1+0.04)

= 1.5846154

As this is different from the 180-day forward rate , Arbitrage is possible

Arbitrage steps :

1 . Convert $1 million to UK pounds today at spot rate to get 1/1.6 million pounds = 625000 pounds

2. Invest these pounds today in Britain for 180 days. Maturity amount = 625000* (1+0.04) =650000 pounds

3. Sell 650000 pounds in forward at a rate of $1.59/pound to get 1.0335 million US Dollars

Thus, US investors can effectively get an interest rate of 3.35% by using Covered Interest Arbitrage as against 3% stated.

Assume the following information:
Spot rate of £ = $1.60
180-day forward rate of £ =
$1.56
180-day British interest rate =
4%
180-day U.S. interest rate= 3%
(a) Based on this
information, is covered interest arbitrage by U.S. investors
feasible (assuming that U.S. investors use their own funds)?
Explain.
(b) Does interest
rate parity exist? Explain.
(Please provide detailed
answers)

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.

Assume the following information:
Spot rate of
Mexican peso
= $0.1
180‑day
forward rate of Mexican peso = $0.098
180‑day
Mexican interest rate
= 6%
180‑day U.S.
interest rate
= 5%
Given this information, is covered interest arbitrage
worthwhile for Mexican investors who have pesos to invest? Assume
you have MXP1,000,000 as your initial investment. Explain your
solution.

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...

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.

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.

Assume the following information:
Current spot rate of
Euro
=
$1.156/1 Euro
1-year forward rate of Euro
=
$1.175/1 Euro
1-Year interest rate in U.S.
=
3.2% per year
1-Year interest rate in Euro
=
2.3% per year
I) From a graphical analysis viewpoint of the Interest
Rate Parity Condition, does this situation
A) Lie above the IRP Line
B) Lie on the IRP Line
C) Lie below the IRP Line
...

Assume the current spot rate is CAD1.3610 and the 1-year forward
rate is CAD1.3550. The nominal risk-free rate in Canada is 2.23
percent while it is 2.16 percent in the U.S. Using covered interest
arbitrage you can earn an extra _____ profit over that which you
would earn if you invested $1 in the U.S. for one year.
$0.0036
$0.0040
$0.0044
$0.0048
$0.0052

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?

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.

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