Question
In: Finance
Suppose that the current spot exchange rate of the EUR is USD 1.15 / EUR and...
Suppose that the current spot exchange rate of the EUR is USD 1.15 / EUR and the 3-month forward exchange rate is USD $1.10 / EUR. The 3-month interest rate is 6% per annum in the US and 4% per annum in Germany. Assume that you can borrow EUR 1,000,000 or USD 1,150,000. 1. Determine whether interest rate parity is currently holding. 2. If IRP is no holding, how would you carry out covered interest arbitrage (CIA)? Show all the steps and determine the arbitrage profit. Assume you choose to keep your profits in US dollars. 3. Do the problem again, assuming that you choose to keep your profits in euros.
Solutions
jeff jeffy answered 8 months agoRelated Solutions
Suppose that the current spot exchange rate of the EUR is USD 1.15 / EUR and...
Suppose that the current spot exchange rate of the EUR is USD
1.15 / EUR and the 3-month forward exchange rate is USD $1.10 /
EUR. The 3-month interest rate is 6% per annum in the US and 4% per
annum in Germany. Assume that you can borrow EUR 1,000,000 or USD
1,150,000.
1. Determine whether interest rate parity is currently
holding.
2. If IRP is no holding, how would you carry out covered
interest arbitrage (CIA)? Show all the...
Suppose that the current spot exchange rate of the EUR is USD 1.25 / EUR and...
Suppose that the current spot exchange rate of the EUR is USD
1.25 / EUR and the 3-month forward exchange rate is USD $1.10 /
EUR. The 3-month interest rate is 4% per annum in the US and 3% per
annum in Germany. Assume that you can borrow EUR 1,000,000 or USD
1,000,000.
Determine whether interest rate parity is currently holding.
If IRP is no holding, how would you carry out covered interest
arbitrage (CIA)? Show all the steps and...
Assume that you are in Germany. The current spot exchange rate of the Euro (EUR) against...
Assume that you are in Germany. The current spot exchange rate
of the Euro (EUR) against the US dollar (USD) is 0.8426 EUR per USD
(EUR/USD). Suppose that the spot exchange rate is 0.8730 EUR/USD
tomorrow. Has the USD appreciated or depreciated against the EUR?
Calculate the percentage change in the USD.
Suppose the spot exchange rate between Brazilian real and euros is S0BRL∕EUR= BRL 2.9488∕EUR. Calculate forward...
Suppose the spot exchange rate between Brazilian real and euros
is S0BRL∕EUR= BRL 2.9488∕EUR. Calculate forward exchange rates at
1-year,2-year, and 3-year horizons under these two scenarios. a.
Yield curves in euros and real are flat. Annual Eurocurrency
interest rates are iBRL= 5 percent and iEUR= 1 percent for the next
several years.
b. The euro yield curve is flat at iEUR= 1.0 percent per year.
Brazilian real interest rates are 5.5 percent per year at a 1-year
horizon, 5.0...
Given the following midpoint spot exchange rates: USD/EUR 0.9119, CHF/USD 1.5971, and USD/JPY 128.17, calculate all...
Given the following midpoint spot exchange rates: USD/EUR
0.9119, CHF/USD 1.5971, and USD/JPY 128.17, calculate all of the
cross-exchange rates.
Suppose the exchange rate for the Canadian dollar (USD/CAD) is quoted as 1.34 in the spot...
Suppose the exchange rate for the Canadian dollar (USD/CAD) is
quoted as 1.34 in the spot market and 1.30 in the 90-day forward
market. Does the financial market expect the Canadian dollar to
strengthen or weaken relative to the dollar?
Current spot exchange rates (2020) EUR/USA CNY/USA JPY/USA 1.1848 0.1463 0.9418 Current interest rate (2020) EUR...
Current spot exchange rates (2020)
EUR/USA
CNY/USA
JPY/USA
1.1848
0.1463
0.9418
Current interest rate (2020)
EUR
CNY
JPY
USA
0%
3.85%
-0.10%
0.26%
Inflation rate forecasts (2020)
EUR
CNY
JPY
USA
0.27%
3%
0.80%
2.36%
IFE: 1 year forecast
EUR/USA
CNY/USA
JPY/USA
Exchange Rate
PPP: 1 year forecast
EUR/USA
CNY/USA
JPY/USA
Growth rate
Growth + 1
Exchange rate
1 year forward rate
EUR/USA
CNY/USA
JPY/USA
Bid
Ask
Mid point
Expected change in the USA value
EUR/USA
CNY/USA
JPY/USA
IFE
PPP...
Suppose that the current spot exchange rate is $1.25/€ and the 1-year forward exchange rate is...
Suppose that the current spot exchange rate is $1.25/€ and the
1-year forward exchange rate is $1.20/€. The 1-year interest rate
is 2.00 percent per annum in the United States and 5.00 percent per
annum in France. Assume that you can borrow up to $1,000,000 or
€800,000. Calculate your arbitrage profit in €.
11. The spot exchange rate is 110.0JPN/USD and the semiannually compounded risk-free rate of USD is...
11. The spot exchange rate is 110.0JPN/USD and the semiannually
compounded risk-free rate of USD is 5.06%. You observe a exchange
forward with 9-month maturity is 112.9JPN/USD. a. What risk-free
rate of JPN is implied by this forward price? b. Suppose you
believe the risk-free rate of JPN over the next 9 months will be
only 0.5%. What arbitrage would you undertake? c. Suppose you
believe the risk-free rate of JPN will be 3 % over the next 9
months....
S(EUR/USD) = EUR/USD 1.1 Annual interest rate in Euro zone = 0.5% Annual interest rate in...
S(EUR/USD) = EUR/USD 1.1
Annual interest rate in Euro zone = 0.5%
Annual interest rate in US = 2%
Bank A offers: F(EUR/USD) = EUR/USD 1.2.
Check for the presence of an arbitrage opportunity (Covered
interest
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