Question

In: Finance

Using Covered Interest Arbitrage Zuber, Inc., is a U.S.-based MNC that has been aggressively pursuing business...

Using Covered Interest Arbitrage
Zuber, Inc., is a U.S.-based MNC that has been aggressively pursuing business in Eastern Europe since the Iron Curtain was lifted in 1989. Poland has allowed its currency’s value to be market determined. The spot rate of the Polish zloty is $.40. Poland also has begun to allow investments by foreign investors as a method of attracting funds to help build its economy. Its interest rate on 1-year securities issued by the federal government is 14 percent, which is substantially higher than the 9 percent rate currently offered on 1- year U.S. Treasury securities.
A local bank has begun to create a forward market for the zloty. This bank was recently privatized and has been trying to make a name for itself in international busi- ness. The bank has quoted a 1-year forward rate of $.39 for the zloty. As an employee in Zuber’s international money market division, you have been asked to assess the possibil- ity of investing short-term funds in Poland. You are in charge of investing $10 million over the next year. Your objective is to earn the highest return possible while maintain- ing safety (since the firm will need the funds next year).
While the exchange rate has just become market determined, there is a high probabil- ity that the zloty’s value will be volatile for several years as it seeks its true equilibrium value. The expected value of the zloty in 1 year is $.40, but there is a high degree of uncertainty about this. The actual value in 1 year may be as much as 40 percent above or below this expected value.
a. Would you be willing to invest the funds in Poland without covering your position? Explain.
b. Suggest how you could attempt covered interest arbitrage. What is the expected return from using covered interest arbitrage?
c. What risks are involved in using covered interest arbitrage here?
d. If you had to choose between investing your funds in U.S. Treasury bills at
9 percent or using covered interest arbitrage, what would be your choice? Defend your answer.

Please explain deeply

Solutions

Expert Solution

Please give a thumbs up. It will help me.


Related Solutions

Vincey, Inc., is a U.S.-based MNC that has been aggressively pursuing business in Eastern Europe since...
Vincey, Inc., is a U.S.-based MNC that has been aggressively pursuing business in Eastern Europe since the Iron Curtain was lifted in 1989. Poland has allowed its currency’s value to be market determined. The spot rate of the Polish zloty is $.40. Poland also has begun to allow investments by foreign investors, as a method of attracting funds to help build its economy. Its interest rate on one-year securities issued by the federal government is 14 percent, which is substantially...
Covered Interest Arbitrage. Assume the following information:                                 &nbsp
Covered Interest Arbitrage. Assume the following information:                                                                                                               Quoted Price                 Spot rate of Canadian dollar                                                  $.90                 90‑day forward rate of Canadian dollar                               $.88                 90‑day Canadian interest rate                                                4.4%                 90‑day U.S. interest rate                                                          1.6% Given this information, what would be the yield (percentage return) to a U.S. investor who used covered interest arbitrage? (Assume the investor invests $1,000,000.) What market forces would occur to eliminate any further possibilities of covered interest arbitrage?
Explain why uncovered interest arbitrage is considered more risky than covered interest arbitrage.
Explain why uncovered interest arbitrage is considered more risky than covered interest arbitrage.
K, Inc., a U.S.-based MNC, has screened several targets. Based on economic and political considerations, only...
K, Inc., a U.S.-based MNC, has screened several targets. Based on economic and political considerations, only one eligible target remains in Malaysia. K would like you to value this target and has provided you with the following information: • K expects to keep the target for three years, at which time it expects to sell the firm for 500 million Malaysian ringgit (MYR) after deducting any taxes due. • K expects a strong Malaysian economy. Consequently, the estimates for revenues...
Klimewsky, Inc., a U.S.-based MNC, has screened several targets. Based on economic and political considerations, only...
Klimewsky, Inc., a U.S.-based MNC, has screened several targets. Based on economic and political considerations, only one eligible target remains in Malaysia. Klimewsky would like you to value this target and has provided you with the following information: Klimewsky expects to keep the target for three years, at which time it expects to sell the firm for 500 million Malaysian ringgit (MYR) after any taxes paid.                 •             Klimewsky expects a strong Malaysian economy. Consequently, the estimates for revenues for...
Izzy Inc., a U.S.-based MNC, has screened several targets. Based on economic and political considerations, only...
Izzy Inc., a U.S.-based MNC, has screened several targets. Based on economic and political considerations, only one eligible target remains in Malaysia. Izzy would like you to value this target and has provided you with the following information: Izzy expects to keep the target for three years, at which time it expects to sell the firm for 500 million Malaysian ringgit (MYR) after deducting the amount for any taxes paid. Izzy expects a strong Malaysian economy. Consequently, the estimates for...
Definitions: Forward ERs, Swaps, Triangle arbitrage, Covered interest arbitrage, Carry trade
Definitions: Forward ERs, Swaps, Triangle arbitrage, Covered interest arbitrage, Carry trade
Calculate the dollar profit from the covered interest arbitrage stragety using the information below. Assume 1000000....
Calculate the dollar profit from the covered interest arbitrage stragety using the information below. Assume 1000000. Do not round any interimaditae caculations ( keep at least two decimals). Cureent spot rate of new zealand dollar (USD/NZD) = 0.56 One year forward rate of the New Zealand dollar (USD/NZD) = 0.73 Annual IR on New Zealand dollars (in%) = 1.31 Annual IR on U.S. dollars (%) = 0.89
Althea the arbitrageur wants to make a riskless profit by attempting covered interest arbitrage. She has...
Althea the arbitrageur wants to make a riskless profit by attempting covered interest arbitrage. She has $1,000,000 and sees the following spot and forward rate quotes offered:                         Spot = $1.40/Euro                         Forward180 day = $1.42/Euro                   Alana can earn 5% interest per annum on a 1-year US government bond and 3% interest per annum on the equivalent French bond. Assuming Alana can sell either bond after six months for the same price she paid, excluding trading costs does Alana...
Covered interest arbitrage and IRP. What is the relationship between forward rates and interest rates? If...
Covered interest arbitrage and IRP. What is the relationship between forward rates and interest rates? If ? = ? and ?௛ ≠ ?௙, is arbitrage possible? a. Assume the following information: You have $1,000 to invest: Current spot rate of Australian dollar = $0.95 180-day forward rate of Australian dollar = $0.94 6-month deposit rate in U.S. = 4% 6-month deposit rate in Australia = 6% If you use covered interest arbitrage for a 180-day investment, what will be the...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT