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. |
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interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically. |
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interest rate parity exists and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically. |
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interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically. |
The yield from the CIA problem above is:
12% |
||
.042% |
||
-1.2% |
||
none of the above |
Your company will receive C$600,000 in 90 days. The 90-day forward rate in the Canadian dollar is $.80. If you use a forward hedge, you will:
receive $750,000 today. |
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receive $750,000 in 90 days. |
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pay $750,000 in 90 days. |
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receive $480,000 in 90 days. |
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receive $480,000 today. |
Interest rate parity doesn't exist and covered interest arbitrage by U.S. investor’s results in a yield above what is possible domestically.
The yield from the CIA problem above is
None of the above
Amount required to invest by us |
$10,00,000 |
spot rate of Singapore dollar |
$0.40 |
2500000 |
|
Deposit rate offered on Singapore dollars |
1.1 |
2750000 |
|
One year forward rate to Singapore dollars |
$0.41 |
$11,33,000.00 |
|
Yield [$1,133,000-$1,000,000]/1000,000 |
13.3% |
Your company will receive C$600,000 in 90 days. The 90-day forward rate in the Canadian dollar is $.80. If you use a forward hedge, you will:
receive $480,000 in 90 days.
($600,000*$0.80)
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