Spot rate of Mexican peso = $ .100 1-year Forward rate of Mexican peso = $...

Spot rate of Mexican peso = $ .100

1-year Forward rate of Mexican peso = $ .098

Mexican interest rate = 8%

U.S. interest rate = 5%

Show how to identify any arbitrage opportunity based on the Interest Rate Parity (IRP). What is your strategy to achieve your profit? What is your arbitrage profit per $1,000,000 (CIA)?

Expert Solution

jeff jeffy answered 1 year ago

2. Covered Interest Arbitrage. Assume the following information: Spot rate of Mexican peso = $.100 180day...

2. Covered Interest Arbitrage. Assume the following information: Spot rate of Mexican peso = $.100 180day forward rate of Mexican peso = $.099 180day Mexican interest rate = 6% 180day U.S. interest rate = 4% Given this information, is covered interest arbitrage worthwhile for Mexican investors who have pesos to invest? Explain your answer. Assume you have 1,000,000 Pesos to invest (MXP). SHOW WORK

Suppose a bank is quoting the following for the Mexican Peso/$ spot exchange rate, and sees...

Suppose a bank is quoting the following for the Mexican Peso/$ spot exchange rate, and sees the following interest rates (ignore bid/ask spreads): Spot exchange rate: MXN 21.50/USD Interest rate on a 180-day Mexican asset (quoted on an annual basis) = 4.95% Interest rate on a 180-day US asset (quoted on an annual basis) = 0.28% Given these quotes, what should be the 180-day forward MXN/USD exchange rate quoted by the bank under the assumption covered interest parity...

You expect that the Mexican peso will appreciate against the Australian dollar from its spot rate...

You expect that the Mexican peso will appreciate against the Australian dollar from its spot rate of A$0.2275 to A$0.2552 in one year. The following interbank lending and borrowing rates exist: Lending Rate Borrowing Rate Australian dollar 7.92% 8.96% Mexican peso 8.18% 9.31% You have a borrowing capacity of either 3 million Australian dollars or 5 million Mexican pesos in the interbank market. Without using your own deposited fund, estimate the profits in percentage. (enter 2 decimal places...

Assume $1 is currently equal to $19.47 Mexican peso in the spot market. Assume the expected...

Assume $1 is currently equal to $19.47 Mexican peso in the spot market. Assume the expected inflation rate in Mexico is 5.98 percent while it is 3.21 percent in the U.S. What is the expected exchange rate one year from now if uncovered interest rate parity exists? DO NOT USE DOLLAR SIGNS OR COMMAS IN YOUR ANSWER. ROUND ANSWER TO THE NEAREST CENT.

Assume $1 is currently equal to $19.33 Mexican peso in the spot market. Assume the expected...

Assume $1 is currently equal to $19.33 Mexican peso in the spot market. Assume the expected inflation rate in Mexico is 5.58 percent while it is 2.80 percent in the U.S. What is the expected exchange rate one year from now if uncovered interest rate parity exists?

1. (a) Assume that the exchange rate between the U.S. dollar ($) and the Mexican peso...

1. (a) Assume that the exchange rate between the U.S. dollar ($) and the Mexican peso (P) is pegged at ER=$1/P4. Assume that, initially, this exchange rate corresponds to equilibrium in the foreign exchange market. Illustrate the initial situation in the market for peso-denominated deposits using demand and supply curves. (b) The United States now undertakes an economic policy that puts upward pressure on the interest rate on dollar-denominated deposits (i). Mexico follows an economic policy that puts downward pressure...

1. On January 1, 1975, the Mexican peso/U.S.$ exchange rate was Ps 12.5 = $1. By...

1. On January 1, 1975, the Mexican peso/U.S.$ exchange rate was Ps 12.5 = $1. By 1985, the exchange rate stood at Ps 208.9 = $1. a. Are these direct or indirect quotes? b. By how much did the Mexican peso appreciate or depreciate against the dollar over this 10-year period? c. By how much did the dollar appreciate or depreciate against the peso over this period? 2. In the second half of 1997, the Indonesian rupiah depreciated by 84%...

US policymakers' decisions to bring down the value of the country's exchange rate, say from US$ 1 = 21 Mexican Peso today to US$1 = 19 Mexican Peso

US policymakers' decisions to bring down the value of the country's exchange rate, say from US$ 1 = 21 Mexican Peso today to US$1 = 19 Mexican Peso, would tend to ____ the value of exports to Mexico; thus, ____ the value of GDP in the United States.reduce ; reducingincrease ; reducingincrease ; increasingreduce ; increasingcannot be assessed based on information provided

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 €.

Assume the current spot rate is CAD1.3250 and the 1-year forward rate is CAD1.3220. The nominal...

Assume the current spot rate is CAD1.3250 and the 1-year forward rate is CAD1.3220. The nominal risk-free rate in Canada is 2.25 percent while it is 2.1 percent in the U.S. Using covered interest arbitrage you can earn an extra _____ profit over that which you would earn if you invested $1 in the U.S. for one year.

Question