Question

In: Finance

Suppose you observe that 90–day interest rate across the eurozone is 6%, while the interest rate...

Suppose you observe that 90–day interest rate across the eurozone is 6%, while the interest rate in the U.S. over the same time period is 3%. Further, the spot rate and the 90–day forward rate on the euro are both $1.60.

You have $600,000 that you wish to use in order to engage in covered interest arbitrage.

After 90–days in the bank, your 375,000 euros will have grown to _______ euros (including interest).

Solutions

Expert Solution

Interest rate in Eurozone = 6% | Interest rate in US = 3% | Time to maturity of interest rate = 90 days

Spot rate = Forward rate = $1.60 per Euro

Capital available in USD = $600,000

Convert in Euros, Capital in Euros = Capital available in USD / Exchange rate = 600,000 / 1.6

You started with USD, hence, USD is the home currency and Euros are the foreign currency.

Capital in Euros = $375,000

Invest 375,000 Euros in eurozone bank for 90 days earnings 6% rate.

Value of 375,000 after 90-days = 375,000 * (1 + Foreign interest rate / m)n / (1 + Domestic interest rate / m)n

Value of 375,000 after 90-days = 375,000 * (1 + 6% / 365)90 / (1 + 3% / 365)90

Value of 375,000 after 90-days = 375,000 * 1.014903 / 1.007424

Value of 375,000 after 90-days = 375,000 * 1.007424

Value of 375,000 after 90-days = 377,783.91 Euros (including interest)

Hence, Value of 375,000 Euro in bank for 90 days, is 377,783.91 Euros.

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

Suppose you observe that 90–day interest rate across the eurozone is 6%, while the interest rate...
Suppose you observe that 90–day interest rate across the eurozone is 6%, while the interest rate in the U.S. over the same time period is 3%. Further, the spot rate and the 90–day forward rate on the euro are both $1.60. You have $600,000 that you wish to use in order to engage in covered interest arbitrage. Which of the following best describes covered interest arbitrage? A.)Using forward contracts to mitigate default risk, while attempting to capitalize on higher interest...
Assume the following information: 90?day U.S. interest rate = 4% 90?day Malaysian interest rate = 3%...
Assume the following information: 90?day U.S. interest rate = 4% 90?day Malaysian interest rate = 3% 90?day forward rate of Malaysian ringgit = $.400 Spot rate of Malaysian ringgit = $.404 Assume that the Santa Barbara Co. in the United States will need 500,000 ringgit in 90 days. It wishes to hedge this payables position. Would it be better off using a forward hedge or a money market hedge? Substantiate your answer with estimated costs for each type of hedge.
Assume the following information: 90?day U.S. interest rate = 4% 90?day Malaysian interest rate = 3%...
Assume the following information: 90?day U.S. interest rate = 4% 90?day Malaysian interest rate = 3% 90?day forward rate of Malaysian ringgit = $.400 Spot rate of Malaysian ringgit = $.404 Assume that the Santa Barbara Co. in the United States will need 500,000 ringgit in 90 days. It wishes to hedge this payables position. Would it be better off using a forward hedge or a money market hedge? Substantiate your answer with estimated costs for each type of hedge.
Assume the following information: 90?day U.S. interest rate = 4% 90?day Malaysian interest rate = 3%...
Assume the following information: 90?day U.S. interest rate = 4% 90?day Malaysian interest rate = 3% 90?day forward rate of Malaysian ringgit = $.400 Spot rate of Malaysian ringgit = $.404 Assume that the Santa Barbara Co. in the United States will need 500,000 ringgit in 90 days. It wishes to hedge this payables position. Would it be better off using a forward hedge or a money market hedge? Substantiate your answer with estimated costs for each type of hedge.
1 A) The 90-day forward rate for the euro is $1.08, while the current spot rate...
1 A) The 90-day forward rate for the euro is $1.08, while the current spot rate of the euro is $1.05. What is the annualized forward premium or discount of the euro? 11.4% discount 11.4% Premium 7.6% premium 7.6% discount 1 B) Assume that a speculator purchases a put option on British pounds (with a strike price of $1.50) for $.05 per unit. A pound option represents 31,250 units. Assume that at the time of the purchase, the spot rate...
a) Assume the rate of interest quoted in the 90-day commercial paper market is 4.0%. You...
a) Assume the rate of interest quoted in the 90-day commercial paper market is 4.0%. You issued $10 million (face value) of 90-day commercial paper, with an interest rate of 4.0%. i) How much did you borrow? Show the supporting calculations. ii) If you borrowed the same amount in the Eurodollar deposit market and paid 4% interest in that market, how much would you pay back in 90 days? Show the supporting calculations. [Note: If you couldn’t figure out the...
One day while walking in the park, you observe a squirrel munching on an acorn, when...
One day while walking in the park, you observe a squirrel munching on an acorn, when suddenly a hawk comes and grabs and eats the squirrel. What is the squirrel in this situation? A. Predator B. Primary consumer C. Prey D. Secondary consumer E. Both B and C F. Both A and D ------------------------- You have formulated a hypothesis: "Pineapples contain more vitamin C than oranges." To test this hypothesis you measure vitamin C levels in 20 oranges and 20...
3. Interest rate parity: The annual, riskless, nominal interest rate in the Eurozone is [– 0.5%]....
3. Interest rate parity: The annual, riskless, nominal interest rate in the Eurozone is [– 0.5%]. The spot rate between the euro (EUR) and the dollar (USD) is USD 1.1074 / EUR and the 90-day forward rate between the euro and the dollar is USD 1.0930 / EUR. a) What is the annual, riskless, nominal interest rate in the US if interest rate parity holds? b) What happens if interest rate parity is violated? Explain. (7 points) a) Calculate annual,...
Assume the rate of interest quoted in the 90-day commercial paper market is 4.0%.
  a) Assume the rate of interest quoted in the 90-day commercial paper market is 4.0%. You issued $10 million (face value) of 90-day commercial paper, with an interest rate of 4.0%. i) How much did you borrow? Show the supporting calculations. ii) If you borrowed the same amount in the Eurodollar deposit market and paid 4% interest in that market, how much would you pay back in 90 days? Show the supportingcalculations. [Note: If you couldn’t figure out the...
Question 6. In your own words, explain interest rate parity. Do we observe interest rate parity...
Question 6. In your own words, explain interest rate parity. Do we observe interest rate parity in the real-world data (e.g. between Canada and the United States)? Why or why not?
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT