Question

Assume that annual interest rates are 5 percent in the United States and 4 percent in...

Assume that annual interest rates are 5 percent in the United States and 4 percent in Turkey. An FI can borrow (by issuing CDs) or lend (by purchasing CDs) at these rates. The spot rate is $0.6591/Turkish lira (TL).

a.

If the forward rate is $0.6735/TL, how could the bank arbitrage using a sum of $4 million? What is the spread earned? (Do not round intermediate calculations. Round your answer to 4 decimal places. (e.g., 32.1616))

  Spread earned %
b.

At what forward rate is this arbitrage eliminated? (Do not round intermediate calculations. Round your answer to 5 decimal places. (e.g., 32.16161))

  Forward rate /TL  

Homework Answers

Answer #1

Spot Rate = $0.6591/TL

As per IRPT,forward rate = Spot rate*(1+interest rate US)/(1+Interest rate Turkey)

= 0.6591(1.05)/(1.04)

= $0.6654/TL

a.Convert 4 million into TL at spot rate

= 4,000,000/0.6591

= TL 6,068,881.81

Invest and get = TL 6,068,881.81(1.04) = TL 6,311,637.08

Convert into dollar at forward rate = 6,311,637.08*0.6735 = $4,250,887.57

Pay back loan = 4,000,000*(1.05) = $4,200,000

Arbitrage Profit = $50,887.57

Spread Earned = 50,887.57/4,000,000 = 1.27%

b.Forward Rate = $0.6654/TL

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
Assume that annual interest rates are 6 percent in the United States and 5 percent in...
Assume that annual interest rates are 6 percent in the United States and 5 percent in Turkey. An FI can borrow (by issuing CDs) or lend (by purchasing CDs) at these rates. The spot rate is $0.6553/Turkish lira (TL). a. If the forward rate is $0.6735/TL, how could the bank arbitrage using a sum of $6 million? What is the spread earned? (Do not round intermediate calculations. Round your answer to 4 decimal places. (e.g., 32.1616))   Spread earned % b....
IRP arbitrage a. If the interest rate in the United Kingdom is 4 percent, the interest...
IRP arbitrage a. If the interest rate in the United Kingdom is 4 percent, the interest rate in the United States is 6 percent, the spot exchange rate is $1.4528/£1, and interest rate parity holds, what must be the one-year forward exchange rate? (Do not round intermediate calculations. Round your answer to 4 decimal places. (e.g., 32.1616))   One-year forward exchange rate $  per £   b. If the forward rate is actually $1.4822/£1, would you borrow in dollars or pounds to make...
IRP arbitrage2 a. If the interest rate in the United Kingdom is 5 percent, the interest...
IRP arbitrage2 a. If the interest rate in the United Kingdom is 5 percent, the interest rate in the United States is 4 percent, the spot exchange rate is $1.6789/£1, and interest rate parity holds, what must be the one-year forward exchange rate? (Do not round intermediate calculations. Round your answer to 4 decimal places. (e.g., 32.1616))   One-year forward exchange rate $  per £   b. If the forward rate is actually $1.6617/£1, would you borrow in dollars or pounds to make...
Suppose the spot and six-month forward rates on the South Korean won are SKW 1,304.99 and...
Suppose the spot and six-month forward rates on the South Korean won are SKW 1,304.99 and SKW 1,314.80, respectively. The annual risk-free rate in the United States is 4 percent, and the annual risk-free rate in South Korea is 5 percent. What must the six-month forward rate be to prevent arbitrage? (Do not include the South Korean won sign (SKW). Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.) Forward rate            SKW
23-1 A bank purchases a six-month $3 million Eurodollar deposit at an interest rate of 7.3...
23-1 A bank purchases a six-month $3 million Eurodollar deposit at an interest rate of 7.3 percent per year. It invests the funds in a six-month Swedish krona bond paying 7.5 percent per year. The current spot rate of U.S. dollars for Swedish krona is $0.1800/SKr. a. The six-month forward rate on the Swedish krona is being quoted at $0.1810/SKr. What is the net spread earned for six months on this investment if the bank covers its foreign exchange exposure...
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?
What is the duration of a two-year bond that pays an annual coupon of 11 percent...
What is the duration of a two-year bond that pays an annual coupon of 11 percent and has a current yield to maturity of 13.7 percent? Use $1,000 as the face value. (Do not round intermediate calculations. Round your answer to 4 decimal places. (e.g., 32.1616)) Duration=? years
Suppose 1-year interest rates are 11% in South Africa and 4% in the United States. The...
Suppose 1-year interest rates are 11% in South Africa and 4% in the United States. The current spot rate of the South African Rand (ZAR) is USD 0.12. Forward contracts on ZAR are available with a 7% discount. Question: Can a US-based investor successfully use Covered Interest Arbitrage in South Africa?
A recent edition of The Wall Street Journal reported interest rates of 2.65 percent, 3.00 percent,...
A recent edition of The Wall Street Journal reported interest rates of 2.65 percent, 3.00 percent, 3.38 percent, and 3.65 percent for three-year, four-year, five-year, and six-year Treasury notes, respectively. According to the unbiased expectations theory of the term structure of interest rates, what are the expected one-year rates during years 4, 5, and 6? (Do not round intermediate calculations. Round your answers to 2 decimal places. (e.g., 32.16))   
Problem 20-7 Interest Rates and Arbitrage The treasurer of a major U.S. firm has $22 million...
Problem 20-7 Interest Rates and Arbitrage The treasurer of a major U.S. firm has $22 million to invest for three months. The interest rate in the United States is .22 percent per month. The interest rate in Great Britain is .27 percent per month. The spot exchange rate is £.622, and the three-month forward rate is £.624. Ignore transaction costs.    What would be the value of the investment in three months if the money is invested in the U.S....