Question

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 and determine the arbitrage
profit. [Hint: You need to determine whether the US investor or UK
investor can borrow and capitalize]

c. Explain how the IRP will be restored as a result of covered
arbitrage activities.

Answer #1

Currently, the spot exchange rate is $1.50/£ and the six-month
forward exchange rate is $1.52/£. The six-month interest rate is
8.0% per annum in the U.S. and 3% per annum in the U.K. Assume that
you can borrow as much as $1,500,000 or £1,000,000.
Answer The Following:
a. Determine whether the interest rate parity is currently
holding?
b. If the IRP is not holding, how would you carry out covered
interest arbitrage? (Show all the steps and determine the arbitrage...

Currently, the spot exchange rate is $1.50/£ and the
three-month
forward exchange rate is $1.52/£. The three-month interest rate
is
8.0% per annum in the U.S. and 5.8% per annum in the U.K.
Assume that you can borrow as much as $1,500,000 or
£1,000,000.
• Determine whether the interest rate parity is currently
holding.
• If the IRP is not holding, how would you carry out covered
interest arbitrage? Show all the steps and determine the
arbitrage profit.

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...

Currently, the spot exchange rate is $1.52/£ and the three-month
forward exchange rate is $1.54/£. The three-month interest rate is
5.84% per annum in the U.S. and 5.84% per annum in the U.K. Assume
that you can borrow as much as $1,500,000 or £1,000,000.
Is the interest rate parity (IRP) currently holding?
Yes
NO

Currently, the spot exchange rate is 1.50 USD/GBP and the
three-month forward exchange rate is 1.510 USD/GBP. The three-month
interest rate is 5.0% per annum in the U.S. and 2.0% per annum in
the UK. Assume that you can borrow as much as $1,500,000 or
£1,000,000.
a/ What is the implied three-month U.S.per annuminterest
rate? (round to 2 decimals in %)
b/ Does Interest Rate Parity hold?
c/ Determine the arbitrage profit (if any, otherwise
type "0") and report it...

Suppose that the current exchange
rate is SF1.25/$ and three month forward exchange rate is SF1.30/$.
The three-month interest rate is 4 percent per
annum in United States and 8 percent per
annum in Switzerland. Assume that you can borrow up to
$1,000,000 or SF 1,250,000.
a) Is Interest Rate Parity
holding?
b) If your answer to part a is no,
how would you realize a certain profit via a covered interest
arbitrage? Also determine the size of the arbitrage...

Suppose that the current spot exchange rate is $1.2/£ and the
1-year forward exchange rate is $1.3/£. The U.S. 1-year interest
rate is 5 percent and the U.K. 1-year interest rate is 6 percent.
Assume that you can borrow up to $1.2M or £1M.
a. Show how to realize a certain profit via covered interest
arbitrage, assuming that you want to realize profit in terms of
U.S. dollars. Also determine the size of your arbitrage profit in
U.S. dollars. Please show...

The table below shows the information for exchange rates,
interest rates and inflation rates in the US and
Germany. Answer the following questions
Current spot rate: $1.60/€
One-year forward rate: $1.58/€
Interest rate in the US: 2%
Interest rate in Germany: 4%
Inflation rate in the US: 2%
Inflation rate in Germany: 3%
(a) If you borrowed $1,000 for 1 year, how much money would you owe
at maturity?
(b) Find the 1-year forward exchange rate in $ per €...

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
...

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...

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