Question

Assume there exists a forward foreign exchange market in Ghana
and this market has the based on the information characteristics
below. Assuming there is interest rate parity; calculate UK 90-day
interest rate per annum based on the information below.

90 day interest rates (Ghana) …….13% p.a

90 day interest rates (UK) ………….? p.a

Spot rate…………………………..GHS 6.1000/£

90 day forward rate………………..GHS 6.1200/£

Assume that the Nigerian Naira exhibits a 6-month interest rate of
12 percent p.a while the U.S. dollar exhibits a 6- month interest
rate of 2.5%. From the U.S investor’s point of view the U.S. dollar
is the home currency. According to interest rate parity argument
what should the forward rate premium of the peso with respect to
the U.S. dollar be?

Answer #1

**(A)** Let us assume that a year consists of 360
days, GHS is the domestic currency and GBP is the foreign
currency.

90 days Ghanian Interest Rate = rg = 13% per annum or 3.25% every 90 days

90 days UK Interest Rate = ru = 4R % per annum or R % per 90 days

Spot Rate = S = 6.1 GHS / GBP and 90 day forward rate = F = 6.12 GHS / GBP

F1 / S = (1+rg) / (1+ru)

6,12 / 6.1 = (1.0325) / (1+R)

R = 0.0291 or 11.64% per annum

**NOTE: Please raise a separate query for the solution to
the second unrelated question.**

Question 1
(a) Assume the following information:
Spot rate of £ = $1.60
180-day forward rate of £ = $1.59
180-day British interest rate = 4%
180-day U.S. interest rate = 3%
Based on this information, is covered interest arbitrage by U.S.
investors feasible (assuming that U.S. investors use their own
funds ($1 million))? Explain.
(b) Covered Interest Arbitrage in Both Directions. The one-year
interest rate in New Zealand is 6 percent. The one-year U.S.
interest rate is 10 percent....

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

11)
Trident — the same U.S.-based company discussed in this chapter,
has concluded a second larger sale of telecommunications equipment
to Regency (U.K.). Total payment of £2,000,000 is due in 90 days.
Given the following exchange rates and interest rates, how much is
the dollar receipt of money market hedge at the end of 90 days?
Assumptions
Value
90-day A/R in pounds
£2,000,000.00
Spot rate, US$ per pound ($/£)
$1.5610
90-day forward rate, US$ per pound ($/£)
$1.5421
3-month U.S....

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...

Assume that Calumet Co. will receive 10 million pesos in 15
months. It does not have a relationship with a bank at this time,
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receivables at this time. However, in three months, it will be able
to obtain a one-year (12-month) forward contract to hedge its
receivables. Today the three-month U.S. interest rate is 3% (not
annualized), the 12-month U.S. interest rate is 8%, the three-month
Mexican peso interest rate...

Assume the following information:
Quoted Price
Spot rate of Singapore dollar
$.75
90?day forward rate of Singapore dollar
$.74
90?day Singapore interest rate
4.5%
90?day U.S. interest rate
2.5%
Given this information, what would be the yield (percentage
return) to a U.S. investor who used covered interest arbitrage?
(Assume the investor invests $1,000,000.)
What market forces would occur to eliminate any further
possibilities of covered interest arbitrage?

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 you are a foreign
exchange trader for a bank based in New York. You are faced with
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Arbitrage funds
available
$ 5,000,000
Spot exchange rate
(kr/$)
6.1717 (i.e., 1 dollar = 6.1717 krones)
3-month forward rate
(kr/$)
6.1981
U.S. dollar interest
rate
4.000 % per annum
Danish krone interest
rate
4.950 % per annum
Note:
The maximum amount you may invest is $5,000,000 or its
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Forward versus Money Market Hedge on Payables. Assume
the following information:
90‑day U.S. interest rate
= 2% per 90 days or 8% per year compounded quarterly
90‑day Malaysian interest
rate = 2.5% per 90 days or 10% per year compounded
quarterly
Assume
borrowing and lending rates are the same for
simplicity.
90‑day forward rate of
Malaysian ringgit = $0.31
Spot rate of Malaysian
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Assume that the Santa Barbara Co. in the...

Assume the following information:
Spot rate of £ = $1.60
180-day forward rate of £ =
$1.56
180-day British interest rate =
4%
180-day U.S. interest rate= 3%
(a) Based on this
information, is covered interest arbitrage by U.S. investors
feasible (assuming that U.S. investors use their own funds)?
Explain.
(b) Does interest
rate parity exist? Explain.
(Please provide detailed
answers)

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