Question

In: Accounting

The one year interest rates in Australia and US are 3% and 1%, respectively. The current...

The one year interest rates in Australia and US are 3% and 1%, respectively. The current spot rate is $0.75/AUD. (Show calculation and steps)

a. What should the one year forward rate be (if IRP holds).

b. If the forward rate is $0.70/AUD is there an arbitrage? If so, how can an arbitrageur incorporate a cashless (i.e. not use any of her current cash) arbitrage? Hint: She will need to borrow in the US or Australia at the current rates. Assume that she will use an amount of 1,000,000 USD or AUD (you must choose the right one…)

Expert Solution

Answer:

Interest rate of Australia is 3 %

Interest rate of US is 1 %

Spot rate is $ 0.75 / AUD

1 Year forward rate = Spot rate x (1 + Rate of US) / 1 + rate of Australia)

= $ 0.75 x (1+1 %) / (1 + 3%)

= $ 0.75 x 0.33

= 0.248

givef forward rate = $ 0..70 / AUD

Therefore there is an arbitrage opportunity

Borrowed USD 1,000,000

Interest to to be paid @ 1% 10,000

Total amount will be returned after 1 year 1010,000

Conversion of USD to AUD @ spot rate of 0.75 = 1,333,333.33

Invest in Australia @ 3% = 39, 999.99

Total amount after 1 year = 1,373,333.32

Conversion of USD @ give rate is 0.7 = 96133.32

Amount to be paid = 1010000

Arbitrage - 1106133.32

---------------------------

If you have any query regarding the answer please as me in the comment I am here for help you. Please do not direct thumbs down just ask if you have any query. And if you like my work then please appreciates with up vote
Thank you Very much.

ekkarill92 answered 3 months ago

One year borrowing and deposit interest rates are 10% and 8% respectively in the US and...

One year borrowing and deposit interest rates are 10% and 8% respectively in the US and 8% and 6% respectively in Spain. The spot exchange rate for the US dollar is $1.25 to the EURO. The 12-month forward rate is $1.30 i) Assuming you do not have any initial investment funds, suggest a way you might profit from the pricing inconsistency presented above. (ii) Explain why some of the figures in the question of borrowing and deposit rates are not...

1. a)Countries Australia and France have their interest rates to be 8% and 12 %, respectively....

1. a)Countries Australia and France have their interest rates to be 8% and 12 %, respectively. If their currencies trade according to 2 Australian $s buy one euro in the spot market, what will their future spot rate be in the aforementioned context? b) Define IFE and explain the fact of how it occurs. Is there any deviation from it?

Question 1 (a) One year borrowing and deposit interest rates are 12% and 10% respectively in...

Question 1 (a) One year borrowing and deposit interest rates are 12% and 10% respectively in the US and 10% and 8% respectively in Switzerland. The spot exchange rate for the US dollar is $8 to the Swiss Franc. The 12-month forward rate is $8.5. Suggest a way you might profit from the pricing inconsistency that is presented here, assuming you have no initial investment funds. (b) One year borrowing and deposit interest rates are 12.5% and 10.5% respectively in...

Current one-year interest rates in Europe is 4 percent, while one-year interest rates in the U.S....

Current one-year interest rates in Europe is 4 percent, while one-year interest rates in the U.S. is 2 percent. You convert $200,000 to euros and invests them in France. One year later, you convert the euros back to dollars. The current spot rate of the euro is $1.20. a. According to the IFE, what should the spot rate of the euro in one year be? b. If the spot rate of the euro in one year is $1.12, what is...

4) Given inflation rates of 1% and 3% in Japan and US respectively, what is the...

4) Given inflation rates of 1% and 3% in Japan and US respectively, what is the prediction according to RPPP with regards to the yen /$ exchange rate? 5) The Yen /USD spot exchange rate is 100. The current interest rate is 3% in the U.S. and 1% in Japan. a) Explain the International Fisher Effect (IFE)? b) What will be the exchange value change of the Japan Yen under IFE?

The 1-year interest rate in New Zealand and Australia are 2.5% and 5.5%, respectively. The spot...

The 1-year interest rate in New Zealand and Australia are 2.5% and 5.5%, respectively. The spot exchange rate is 1.35NZD/AUD. If AUD is your local currency, what is the 1-year forward exchange rate (expressed in AUD/NZD)?

(1) if five year interest rates on USD and CDN are 6% and 5% respectively, and...

(1) if five year interest rates on USD and CDN are 6% and 5% respectively, and the current spot rate for CDN is $0.90/USD. what is the imlied five year CDN spot rate? (2) Suppose that the Brazilian real devalues by 40% against the USD. By how much will the dollar appreciate against the real? (3) What is the 90 day forward rate if US interest is 9%, Japanese interest is 7%, and the Spot rate is $0.003700/ Yen? (...

The table below shows current and expected future one-year interest rates, as well as current interest...

The table below shows current and expected future one-year interest rates, as well as current interest rates on multiyear bonds. Use the table to calculate the liquidity premium for each multiyear bond. Year One-Year Bond Rate Multiyear Bond Rate 1 2.00% 2.00% 2 3.00% 5.00% 3 4.00% 7.00% 4 5.00% 8.00% 5 6.00% 10.00% The liquidity premiums for each year are given as: (Enter your responses rounded to two decimal places.) l11 = % l21 = % l31 = %...

Interest Rate Parity One year rates are: US: 2% EUR: 1.5% GBP: 3% The EURUSD rate...

Interest Rate Parity One year rates are: US: 2% EUR: 1.5% GBP: 3% The EURUSD rate is 1.10. The GBPUSD rate is 1.18. 1. What should the 1 year EURUSD forward rate be? 2. What should the 1 year GBPUSD forward rate be? 3. What should the 1 year EURGBP forward rate be? 4. If the 1 year EURUSD forward rate is 1.15, describe the steps needed to earn a riskless profit. 5. If the 1 year GBPUSD forward rate...

If the nominal interest rates in the U.S. and Euro zone are 3% and 2%, respectively,...

If the nominal interest rates in the U.S. and Euro zone are 3% and 2%, respectively, and the inflation rate in the U.S. in the coming year is expected to be 7%. What would be the expected inflation rate in the Euro zone?