Question

**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**

**
Pick either A, B or
C: __________**

**II) If the above situation who (if anyone) would benefit
from covered interest arbitrage for a 1-year investment, European
Investors can earn a higher return from covered interest arbitrage
compared to investing locally (Investing locally is a European
Investor depositing money in European Bank)**

**European Investors can earn a higher return from covered interest arbitrage compared to investing locally (Investing locally is a European Investor depositing money in European Bank)****Neither European nor US Investors****US Investors can earn a higher return from covered interest arbitrage compared to investing locally (US Investor depositing money in US Bank)**

**Pick either A, B or C:
__________**

Answer #1

I). As per interest rate parity, the forward rate should be 1.156*(1+3.2%)/(1+2.3%) = $1.1662/Euro

The quoted forward rate is $1.175/Euro, so this will lie above the IRP line. (Option A)

II). (F/S)*(1+US rate) = (1.175/1.156)*(1+3.2%) = 1.049 > (1+Euro interest rate) which is 1+2.3% = 1.023, so borrow in Euros and invest in dollars, hence, European investors can earn a higher return via covered interest arbitrage than investing in Euros. Option A is correct.

22. Assume the following information:
You have $2,000,000 (US dollars) to invest:
Current spot rate of euro = $1.30
1-year forward rate of euro = $1.25
1-year deposit rate in U.S. = 11%
1-year deposit rate in Europe = 14%
If you use covered interest arbitrage for a 1-year investment, what
will be the amount of U.S. dollars you will have after one year?
(Points : 3.5)
-$2,192,307.69.
-$2,371,200.00.
-$3,672,500.00.
-$1,403,076.92.
Question 23. 23. Continued from...

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....

Use the following information to questions 4-5
The year interest rate in the US is 5% and the 1 year risk free
interest rate in the U.K. is 8.5%. to The current spot rate is
$1.50/Pound and the current forward rate is $1.44/Pound
4. Which statement is correct?
a. Covered interest rate arbitrage involves borrowing in USD and
investing in pounds.
b. covered interest rate arbitrage involves borrowing in pounds
and investing in USD
c. IRP holds so covered interest...

The spot exchange rate is currently $1.31/£ and the six-month
forward exchange rate is $1.25/£. The six-month interest rate is
5.7% per annum in the U.S. and 4.7% per annum in the U.K. Assume
that you can borrow as much as $1,310,000 (in the US) or £1,000,000
(in the U.K.).
a. Determine whether the interest rate parity (IRP) is currently
holding.
b. If the IRP is not holding, how would you carry out covered
interest arbitrage? Show all the steps...

Investors expect that the exchange rate between the euro and the
US dollar will change from 1 euro = $1.22 to 1 euro = $1.15. Show
what investors (European or US investors) make arbitrage profits.
Assume that the interest rate for both markets is 6%. You may
choose any amount for the initial investment.

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...

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.

Currently the spot exchange rate is $1.33/£ and the one year
forward exchange rate is $1.32/£. The yearly interest rate is 1% in
US and 3% in U.K. Assume you can borrow as much as $1,330,000.
a. Is interest rate parity
currently (IRP) holding?
b. If IRP is not holding, how
would you execute a covered interest arbitrage? Show all the steps
what you are going to do today and in one year. Also determine the
arbitrage profit.
c. Explain how IRP will...

Given:
US interest rate 5%
German interest rate 3.5%
One-year forward rate is $1.16/Euro
Spot rate $1.12/Euro
Arbitrager can borrow up to $1,000,000 or Euro 892,857. Doing a
Covered Interest Arbitrage (CIA) how much will the arbitrager
make:
Hint: Start by borrowing $1,000,000 and converting this to Euro,
then convert back Euro to USD after one year.

Assume the following information:
Current spot rate of Australian dollar
=
$.86
Forecasted spot rate of Australian dollar 1 year from now
=
$.88
1-year forward rate of Australian dollar
=
$.93
Annual interest rate for Australian dollar deposit
=
4%
Annual interest rate in the U.S.
=
2%
What is your percentage return from covered interest arbitrage
with $550,000 for one year?

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