Question

Assume the following information: U.S. investors have $1,000,000 to invest: 1-year deposit rate offered on U.S....

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.

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 and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.

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.

receive $750,000 in 90 days.

pay $750,000 in 90 days.

receive $480,000 in 90 days.

receive $480,000 today.

Homework Answers

Answer #1

               

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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