Question

**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 exchange
market. After an analysis of US dollar to British pound exchange
rate data over the past decade, he has come up with his own model
to forecast the £:$ exchange rate one year ahead. Based on this
model, the forecast for the one-year-ahead exchange rate is $1.5315
per £. The spot £:$ is equal to 1.5620. The annual one-year
interest rates 2% in dollars and 4.25% in pounds.**

**a) What is the one-year forward £:$ exchange
rate?**

**b) If the US investor invests based on his model, which
currency would he buy forward?**

Answer #1

1. From International parity,

Real rate of interest in USA = Real rate of Interest in Switzerland

=(1+nominal interest rate in USA)/(1+inflation rate in USA) -1 =(1+nominal interest rate in Switzerland)/(1+inflation rate in Switerland) -1

=> 1.10/1.08 -1 = (1+nominal interest rate in Switzerland)/1.04 -1

=> nominal interest rate in Switzerland = 1.1*1.04/1.08-1 =
0.059259 or **5.93% (One year interest rate in
Switzerland)**

From Interest rate parity theorem

Expected Spot rate after one year / Spot rate = (1+nominal interest rate in Switzerland)/(1+nominal interest rate in USA)

=>Expected Spot rate after one year = 2*1.059259/1.10 =
**1.9259 Swiss Fr/$**

**or $:SFr= 1.9259**

**The Expected one year forward rate and the expected spot
rate in one year are the same in this case**

**Hence, Expected One year forward rate = 1.9259
SFr/$**

One year ago, the spot exchange rate between Japanese yen and
Swiss franc was S_1Y/SFR = ¥160/SFr/ Today, the spot
rate is S_0 ^¥/Sfr = ¥155/SFr. Inflation during the year was p^¥ =
2 percent and p^SFr= 3 percent in Japan and Switzerland,
respectively.
a.) What was the percentage change in the nominal value of the
Swiss franc?
b.) One year ago, what nominal exchange rate would you have
predicted for today based on the difference in inflation rates?
c.)...

The spot rate for the Swiss Franc is $1.0550/SF and the one-year
forward rate is $1.0650/SF. The expected one year interest rates
are 6% p.a. for the US and 4% p.a. for Switzerland. Using the above
rates, can you engage in a covered interest rate arbitrage as an
American investor? Use either $1,000,000 or SF 1,000,000 as the
notational amount. Show any profits in dollars.

Casper Landsten is a foreign exchange trader for a bank in New
York. Using the values and assumptions below, he decides to seek
the full 4.800% return available in U.S. dollars by not covering
his forward dollar receiptslong dashan uncovered interest
arbitrage (UIA) transaction. Assess this decision. Arbitrage funds
available $ 1,000,000 Spot exchange rate (SFr/$) 1.2810 3-month
forward rate (SFr/$) 1.2740 Expected spot rate in 90 days (SFr/$)
1.2700 U.S. Dollar annual interest rate 4.800 % Swiss franc
annualinterest...

Casper Landsten is a foreign exchange trader for a bank in New
York. Using the values and assumptions below, he decides to seek
the full 4.803% return available in U.S. dollars by not covering
his forward dollar receipts—an uncovered interest arbitrage (UIA)
transaction. Assess this decision. Arbitrage funds available $
1,050,000 Spot exchange rate (SFr/$) 1.2813 3-month forward rate
(SFr/$) 1.2741 Expected spot rate in 90 days (SFr/$) 1.2701 U.S.
Dollar annual interest rate 4.803 % Swiss franc annualinterest rate...

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...

Casper
Landsten-Thirty Days Later.
Casper Landsten once again has $1.05 million (or its Swiss franc
equivalent) to invest for three months. He now faces the following
rates. Should he enter into a covered interest arbitrage (CIA)
investment?
Arbitrage funds available
$
1,050,000
Spot exchange rate (SFr/$)
1.3394
3-month forward rate (SFr/$)
1.3283
U.S. Dollar annual interest rate
4.752
%
Swiss franc annual interest rate
3.625
%
The CIA profit potential is __ % (Round to 3 decimal places)

Suppose that the US dollar interest rate and the Swiss Franc
interest rate are the same, 5 percent per year, but that there is a
risk premium of 1 percent associated with holding Swiss Franc
rather than US dollars over the year. (a) What is the relationship
(in percentage terms) between the current equilibrium dollar/franc
exchange rate and its expected future level? (b) If the expected
future exchange rate is $1.12 per franc, what is the equilibrium
dollar/franc (spot) exchange...

A US investor sees an arbitrage opportunity in the currency
markets. The spot exchange rate between the Swiss Franc and US
Dollar is 1.0404 ($ per CHF). Assume the continuously compounded
interest rates in the US and Switzerland are 0.25% and 0%,
respectively. The 3-month currency forward price is 1.0300 ($ per
CHF).\
a) What is the theoretically correct forward price?
b) What is the investor’s total profit (in CHF), assuming she
begins by borrowing 1,000 CHF?

Suppose that the interest rate differential at 3 months between
US Bonds and British Bonds is 5%
At the same time, the interest rate differential at 3 months
between US Bonds and Swiss Bonds is 5%
If the Uncovered Interest Rate Parity holds, the exchange rate
between $ and British Pound, and the exchange rate between $ and
Swiss Franc...
A. must be the same
B. must be different, and in particular, it must be
that the exchange rate between $...

Casper Landsten-CIA (A). Casper Landsten is a foreign exchange
trader for a bank in New York. He has $0.95 million (or its Swiss
franc equivalent) for a short term money market investment and
wonders if he should invest in U.S. dollars for three months, or
make a CIA investment in the Swiss franc. He faces the following
quotes:
Arbitrage funds available
$
950,000
Spot exchange rate (SFr/$)
1.2814
3-month forward rate (SFr/$)
1.2742
U.S. Dollar annual interest rate
4.801
%...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 15 minutes ago

asked 16 minutes ago

asked 39 minutes ago

asked 39 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago