Question

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)**

Answer #1

According to interest rate parity therom currency with higher interest rate will sell in discount in futures market to cancel the arbitrage

Interest in us is 3%

Interest in uk is 4%

So pound will sell in discount in forward market

Arbitrage free price is = s×(1+rf)/(1+rh)

Rf is foreign interest

rh is home interest

= 1.60×(1.03)/1.04 = 1.5846

Actual forward rate is 1.56

So arbitrage opportunity exists for us investors and feasible as theoretical rate and current futures rate is different

b) yes interest rate parity therom holds here in the given case until futures price is equal to theoretical rate investors will take the arbitrage opportunity so ultimately futures price will be equal to arbitrage free price

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.

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....

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.

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.

Consider the following information available in the
Diamond Bank:
Spot Rate for the
British Pound Sterling
$1.60
90 – day forward
rate of the pound
$1.59
90 – day UK
interest rate
4%
90 – day U.S.
interest rate
3%
(a)Given this information, would it be a prudent strategy to engage
in covered interest arbitrage? Explain
(b)If covered interest arbitrage is profitable how much profit
would an investor earn if he/she uses $1,000,000?
(c)Briefly discuss the realignment process that will...

Forward versus Money Market Hedge on Receivables. Assume the
following information:
180‑day U.S. interest rate = 0.07
180‑day British interest rate = 0.09
180‑day forward rate of British pound = $1.50
Spot rate of British pound = $1.41
Assume that Tax Corp. from the United States will receive
412,000 pounds in 180 days. How much more (or less) would the firm
receive in 180 days if it uses a forward hedge instead of a money
market hedge?

Assume the following information:
180-day U.S. interest rate = 5%
180-day British interest rate = 7%
180-day forward rate of British pound = $1.30
Spot rate of British pound = $1.24
Assume that Reviera Corp. from the United States will receive
1,400,000 pounds in 180 days. Showing and explaining all workings,
determine whether it would be better off using a forward hedge or a
money market hedge.

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:
Spot rate of Canadian dollar =
$.80
90-day forward rate of Canadian dollar
= $.79
90-day Canadian interest rate = 4%
90-day US interest rate = 2.5%
Explain the steps you would use in covered interest arbitrage
with $1 million of your own money (no leverage used).
What would be your profit?

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
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Spot rate of Singapore
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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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