Question
In: Finance
If the current 1-year risk free rate in US is 6%, the current 1-year risk free...
If the current 1-year risk free rate in US is 6%, the current 1-year risk free rate in Switzerland (currency symbol: CHF) is 9%, and the current spot rate between USD and CHF is CHF 1.2550/USD.
(1) If interest rate parity holds, what should be the appropriate one year forward rate?
(2) You find out the actual quote from your bank on the one year forward contract is CHF 1.2850 /USD, what would be your covered interest arbitrage profits if you can borrow USD $1,000,000 in US at the risk free rate? To get full credits, you need to include step by step instructions on how to carry out this strategy.
Solutions
jeff jeffy answered 1 year agoRelated Solutions
If the current 1-year risk free rate in US is 6%, the current 1-year risk free...
If the current 1-year risk free rate in US is 6%, the current
1-year risk free rate in Switzerland (currency symbol: CHF) is 9%,
and the current spot rate between USD and CHF is CHF
1.2550/USD.
(1) If interest rate parity holds, what should be the
appropriate one year forward rate?
(2) You find out the actual quote from your bank on the one year
forward contract is CHF 1.2850 /USD, what would be your covered
interest arbitrage profits...
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6. The one-year risk-free interest rate in Mexico is 8%. The
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a. What is the forward rate premium or discount according to the
IRP (using the exact formula)?
b. What is the one-year forward rate of the peso based on the
answer from part (a)?
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is $1.78/£. You can borrow either $1,000,000 or £555,556. According
to IRP, is the forward quote correct? If not, what should it
be?
If the forward quote is not correct, lay out the steps to
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The risk-free rate in the US is 5% and the UK risk-free rate is 8%. The...
The risk-free rate in the US is 5% and the UK risk-free rate is
8%. The spot quote is $1.80/£ while the one year forward quote is
$1.78/£. You can borrow either $1,000,000 or £555,556. According to
IRP, is the forward quote correct? If not, what should it be?
If the forward quote is not correct,
lay out the steps to implement an arbitrage.
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of return (an estimate can be found on Damodaran’s website – look
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Parity does not hold. Then, design. a. sequence of currency trades,
deposits, or loan to exploit this arbitrage opportunity. Point out
which steps in your strategy involve taking on risk and explain the
nature of that...
The annualized US risk-free rate is 8% and the Germany risk-free rate is 5%. Assume that...
The annualized US risk-free rate is 8% and the Germany
risk-free rate is 5%. Assume that any period rates less than a year
can be interpolated (i.e. if you invested for 6 months then you
would receive 4% in the US). The spot quote is €0.80/$ while the
3-month forward quote is €0.7994/$. You can borrow either
$1,000,000 or €800,000. According to IRP, is the forward quote
correct? If not, what should it be?
If the forward quote is not...
The annualized US risk-free rate is 8% and the Germany risk-free rate is 5%. Assume that...
The annualized US risk-free rate is 8% and the Germany
risk-free rate is 5%. Assume that any period rates less than a year
can be interpolated (i.e. if you invested for 6 months then you
would receive 4% in the US). The spot quote is €0.80/$ while the
3-month forward quote is €0.7994/$.You can borrow either $1,000,000
or €800,000. According to IRP, is the forward quote correct? If
not, what should it be?
If the forward quote is not correct,...
The current risk-free rate is 4 percent and the market riskpremium is 6 percent. You...
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Suppose that domestic risk-free rate is 5% annually, and foreign risk free rate is 6% annually....
Suppose that domestic risk-free rate is 5% annually, and foreign
risk free rate is 6% annually. Spot exchange rate between domestic
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the expected exchange rate in one year? (c) According to covered
interest rate parity, what is the arbitrage-free one-year forward
exchange rate?
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