If the ratio between direct quote of forward divided by spot exchange rates of US $ over Mexican Peso is 0.95 and the interest rate in the US is 4%, then the interest rate in Mexico is expected to be:(Please show work)
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- If the ratio between direct quote of forward divided by spot exchange rates of US $ over Mexican Peso is 0.95 and the interest rate in the US is 4%, then the interest rate in Mexico is expected to be:(Please show work)
- A) -1.2%
- B) 3%
- C) 4%
- D) 2%
- E) 5%
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- Match each term in Column A with its related definition in Column B. Column A 1. ____________ Spot rate 2. ____________ Currency appreciation 3. ____________ Translation risk 4. ____________ Transaction risk 5. ____________ Exchange rate Column B a. The rate at which one currency can be traded for another currency. b. The possibility that future cash transactions will be affected by changing exchange rates. c. A month ago, 1 U.S. was worth 8.5 Mexican pesos. Today, 1 is worth 9.0 Mexican pesos. The U.S. dollar has undergone what? d. The degree to which a firms financial statements are exposed to exchange rate fluctuation. e. The exchange rate of one currency for another for immediate delivery (today).Suppose you have the following spot exchange rates: USD/AUD 0.5300 AUD/EUR 1.6428 USD/EUR 0.8782 a) Calculate the US dollar profit (per 1 USD), if any, on a three-point arbitrage. b) Calculate AUD profit (per 1 AUD), if any, on a three-point arbitrage. c) How can you explain the answers in (1) and (2)?(Problem 3) 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. 1. Determine whether the interest rate parity is currently holding (just enter either yes or no): 2. If the IRP is not holding, compute and enter the total amount of arbitrage profit in dollars round to zero decimal. A positive number means profit. A negative number means loss) 3. If the IRP is not holding, compute and enter the total amount of arbitrage profit in pound i.e., round to zero decimal. A positive number means profit. A negative number means loss) (just enter yes or no) (if your profit is $2,000.00, just enter "2,000", i.e., (if your profit is 2,000.00 pound, just enter "2,000",
- a) A stock sells for $125. A call option on the stock has an exercise price of $110 and expires in 3 months. If the interest rate is 0.15 and the standard deviation of the stock's return is 0.30. What would be the price of a put option on the same stock with an exercise price of $140 and the same time (3 months) until expiration? Show all workings. (See Appendix for the Cumulative Normal Distribution Table)Currently, the spot exchange rate is $1.67 per £ and the three-month forward exchange rate is $1.69 per £. 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 $1,670,000 or £1,000,000. Required: 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? What will be your arbitrage profit? c. Explain how the IRP will be restored as a result of covered arbitrage activities. Complete this question by entering your answers in the tabs below. Required A Required B Required C Determine whether the interest rate parity is currently holding. Determine whether the interest rate parity is currently holding.Currently, the spot exchange rate is $1.51 per £ and the three-month forward exchange rate is $1.53 per £. 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 $1,510,000 or £1,000,000. Required: 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? What will be your arbitrage profit? c. Explain how the IRP will be restored as a result of covered arbitrage activities. Complete this question by entering your answers in the tabs below. Required A Required B Required C If the IRP is not holding, how would you carry out covered interest arbitrage? What will be your arbitrage profit? Note: Do not round intermediate calculations. Interest arbitrage Arbitrage profit Borrow in the U.S. and invest in the U.K. Hedge exchange rate risk by selling British pounds forward. < Required A Required C
- You are given the following information:Spot exchange rate (AUD/EUR) 1.60One-year forward rate (AUD/EUR) 1.62One-year interest rate on the Australian dollar 8.5%One-year interest rate on the euro 6.5%(a) Is there any violation of CIP?(b) Calculate the covered margin (going short on the AUD).(c) Calculate the interest parity forward rate and compare it with the actual forward rate.The next two questions are based on the following information Consider the following prices in the international money markets: Spot rate: USD1.275/GBP One-year Forward rate: USD1.364/GBP Interest Rate (UK): 2.39% Interest Rate (US): 11.66% Assuming no transaction costs, which of the following statements is true? An arbitrage can be obtained by borrowing in the currency that is expressing the other currency. An arbitrage can be obtained by investing in the currency that is expressing the other currency. An arbitrage can be obtained by borrowing in the currency that is being expressed by the other currency. O d. An arbitrage cannot be obtained by investing in the currency that is being expressed by the other currency. O e. None of the option in this question are correct. O a. O b. O c. What should the forward rate be for the International Fisher Effect to hold? GBP1.4875/USD GBP1.3904/USD USD1.3904/GBP d. USD1.4875/GBP O e. None of the options in this question. a. O b. OcThe one-year interest rate in a European and a Mexican bank is 1% and 12% respectively. The spot exchange rate is EMX$/€ = 18.67 while the one -year forward exchange rate offered by the European bank is F€/MX$ = 0.05. i. Is there an opportunity for arbitrage? Calculate the interest forward exchange rate that eliminates it. ii. What steps would someone take to make an arbitrage profit, and how would he profit if he must borrow 1,000€ from a European bank?
- Suppose that the annual interest rates on 6-months borrowing in Romania and the United States are 12.7 % and 0.8 %, respectively. The current spot rate RON/US$ is 4.00 and 6-months forward rate RON/US$ is 4.21. Does interest rate parity hold?assuming japan to be the home country, suppose you have the following data: Japanese interst rate=1% p.a., Brazilian interest rate = 10% p.a. Spot rate=0.025BRL/Yen, 1 year forward rate=0.026BRL/yen 1). Compute the annualized forward premium/discount on Yen b). Compute the annual interest rate differential between countries c). is tere a possibilit for earning risk-free profit? if soc compute the profit if you have an equivalent of 100 million Yen at your disposal. d). what is such a profit called? e). at what forward rate, the profit making arrangement will lose its lucrativeness?Assuming you have the following information: the current exchange rate is SGD 0.40/ MYR. Meanwhile, the SGD 0.3907/ MYR of the three-month forward exchange rate. The interest rate of three- month is 5.6 percent per year in RB Malaysia. The interest rate of three-month is S.4 percent per year in CBC Singapore. Assume that you can borrow up to MYR1.000.000. (a) Assuming that you want to realize profit in terms of Ringgit Malaysia/SGD,determine the size of your arbitrage profits. b) Assume that you want to realize profit in terms of Singaporean Dollar. Thow the covered arbitrage process and determine the arbitrage profit in SGD.
