Question

Use the following information to answer question 1 and 2 Jennifer Hart worked at Goldman Sachs....

Use the following information to answer question 1 and 2

Jennifer Hart worked at Goldman Sachs. She notices the following quotes:

Spot exchange rate $1.312/£

One-year forward exchange rate                                $1.275/£

One-year Pound interest rate                                      3.25% per year

One-year Dollar interest rate                                      2.75% per year

1. According to the Interest Rate Parity condition, what is the 1 year forward exchange rate?

a. $1.269/£
b. $1.281/£
c. $1.318/£
d. $1.306/£

2.Assuming that Jennifer Hart can work with 1,000,000 Pound or 1,312,000 Dollar; compute the arbitrage profit?

a. £57,317.65
b. £59,180.47
c. £24,817.65
d. $31,642.5

Homework Answers

Answer #1

1.As per IRPT, fair forward rate = spot rate*(1+Interest rate in Dollar)/(1+Interest rate in Pound)

= 1.312(1+0.0275)/(1+0.0325)

= $1.306/Pound

i.e. d

4.Starting with pound 1,000,000

Convert into Dollar at spot rate and get 1,000,000*1.312= $ 1,312,000

Invest and get 1,312,000(1+0.0275) = $1,348,080

Convert into pound at forward rate and get 1,348,080/1.275 = Pound 1,057,317.65

Pay back Loan 1,000,000(1+0.0325) = Pound 1,032,500

Arbitrage Profit = Pound 24,817.65

i.e. c

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
You work as a trader for the arbitrage desk at Goldman Sachs, monitoring spot and futures...
You work as a trader for the arbitrage desk at Goldman Sachs, monitoring spot and futures foreign exchange rates. At 9am Eastern time you observe the following market prices and rates. The spot exchange rate between US$ and Canadian dollar is $1.1100/C$, while futures price of Canadian dollar for the contract maturing in 6 months is $1.0400/C$. The US 6-month interest rate is 6.5% per annum, while Canadian 6-month interest rate is 3.5% per annum. Both interest rates are based...
Question 1(25 marks) (a) Assume the following information: Spot rate of £ = $1.60 180-day forward...
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....
1. 27 The 1-year interest rates on Canadian dollar and U.K. pound are 2 % and...
1. 27 The 1-year interest rates on Canadian dollar and U.K. pound are 2 % and 5 % respectively. If the current spot rate is 2 Canadian dollar per pound, then the 1-year forward rate (F Canadian $/£ ) implied by the covered interest rate parity approximation would be______. Select one: a. 2.15 b. 2.06 c. 1.94 d. 0.97 1.29 If the spot exchange rate between dollars and pounds is equal to 1.8 dollars for one U.K. pound and the...
Suppose that the annual interest rate is 3.25 percent in the United States and 4 percent...
Suppose that the annual interest rate is 3.25 percent in the United States and 4 percent in Germany and that the spot exchange rate is $1.50/€ and the forward exchange rate, with one-year maturity, is $1.55/€. Assume that an arbitrager can borrow up to $1,000,000 or its equivalent in Euro. If an astute trader finds an arbitrage, what is the net cash flow in one year in dollar and in Euro?
Use the following information to answer the next three questions. 1. As of today, the spot...
Use the following information to answer the next three questions. 1. As of today, the spot exchange rate is £1.25/$. The U.S. interest rate is 7% and the interest rate in the euro zone is 10%. What is the one-year forward rate (in terms of a direct quote from the US view) that should prevail according to IRP? Round intermediate steps and your final answer to four decimals. Suppose that the one year forward rate is $.75/£ . Find the...
1. The company uses Goldman Sachs for its investment banker and Peter Fields, a Goldman Sachs...
1. The company uses Goldman Sachs for its investment banker and Peter Fields, a Goldman Sachs managing director, has suggested that McCormick consider on of two choices for financing. There is an innovative hedge fund group that will loan $350 million to Mc Cormick for 10 years in a zero interest bond. At the end, McCormick will owe $550 million. The fee to Goldman will be paid by the hedge fund.   Use the PV function to calculate the present value...
1. Suppose the annual interest rate is 3.5% in U.S. and 4.5% in U.K., and that...
1. Suppose the annual interest rate is 3.5% in U.S. and 4.5% in U.K., and that the spot exchange rate is S($/£) = 1.3918 and the forward exchange rate with 12-month maturity is F12($/£) = 1.3526. Assume you are a U.S. trader and can borrow up to $1,000,000 (or £1,000,000). Answer the following questions. a. Is there an arbitrage opportunity according to the Interest Rate Parity based on the above information? (show your work!) b. Show the strategy to capture...
Assume the following information: U.S. investors have $1,000,000 to invest: 1-year deposit rate offered on U.S....
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...
1. You observe that one U.S. dollar is currently equal to 3.6 Brazilian reals in the...
1. You observe that one U.S. dollar is currently equal to 3.6 Brazilian reals in the spot market.  The one year US interest rate is 7% and the one year Brazilian interest rate is 4%. One year later, you observe that one U.S. dollar is now equal to 3.2 Brazilian reals in the spot market. You would have made a profit if you had: Borrowed U.S. dollars and invested in U.S. dollars Borrowed Brazilian reals and invested in Brazilian reals Borrowed...
1. Suppose the expected annual rate of inflation for the coming year is 8% for the...
1. Suppose the expected annual rate of inflation for the coming year is 8% for the US and 4% for Switzerland. The current spot exchange rate is $:SFr=2. The one-year interest rate is 10% in the US. Using the precise form of the international parity relations, compute the one-year interest rate in Switzerland, the expected Swiss franc to pound exchange rate in one year, and the one-year forward exchange rate. 2. A US investor likes to invest in the foreign...