Question

In: Finance

the annualized risk-free rate in the eurozone is 5% and the annualized UK risk-free rate is...

the annualized risk-free rate in the eurozone is 5% and the annualized UK risk-free rate is 3%. The spot quote is €1.18/£ while the one year forward quote is €1.25/£. You can borrow either €1,000,000 or £847,457.6.

According to interest rate parity, is the forward quote correct? If not, what should it be?

If the forward quote is not correct, how much money would you profit if you implemented the proper arbitrage?

Multiple Choice

  • Forward rate should be €1.2643/£; arbitrage would net you €110,513

  • Forward rate should be €1.2643/£; arbitrage would net you €93,786

  • Forward rate should be €1.2029/£; arbitrage would net you €41,102

  • Forward rate should be €1.2029/£; arbitrage would net you €45,721

  • Forward rate should be €1.2029/£; arbitrage would net you €51,354

Solutions

Expert Solution

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

The annualized risk-free rate in the eurozone is 3% and the annualized UK risk-free rate is...
The annualized risk-free rate in the eurozone is 3% and the annualized UK risk-free rate is 5%. The spot quote is €1.20/£ while the one year forward quote is €1.25/£. You can borrow either €1,000,000 or £833,333.33. According to interest rate parity, is the forward quote correct? If not, what should it be? If the forward quote is not correct, how much money would you profit if you implemented the proper arbitrage? Multiple Choice: Forward rate should be €1.2643/£; arbitrage...
• The risk-free rate in the US is 5% and the UK risk-free rate is 8%....
• 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. The annualized US risk-free rate is 8% and the Germany risk-free rate is 5%. Assume...
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 $1,000,000 or £555,556. According to IRP, is the forward quote correct? If not, what should it be? If the forward quote is not correct, lay out the steps to implement an arbitrage.
The annualized US risk-free rate is 8% and the Germany risk-free rate is 5%. Assume that...
The annualized US risk-free rate is 8% and the Germany risk-free rate is 5%. Assume that any period rates less than a year can be interpolated (i.e. if you invested for 6 months then you would receive 4% in the US). The spot quote is €0.80/$ 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,...
Stock ABC is currently trading at $22.31. The annualized risk-free rate is 6%, compounded monthly, and...
Stock ABC is currently trading at $22.31. The annualized risk-free rate is 6%, compounded monthly, and the stock's annualized dividend yield is 5%. You want to buy a 9-month put option. What is the strike price of the 6-month option that is at-the-money?
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 currency and foreign currency is 1:1. (a) According to uncovered interest rate parity, which currency is expected to worth more in one year? (b) According to uncovered interest rate parity, what is the expected exchange rate in one year? (c) According to covered interest rate parity, what is the arbitrage-free one-year forward exchange rate?
a). What is the market risk premium if the risk free rate is 5% and the...
a). What is the market risk premium if the risk free rate is 5% and the expected market return is given as follows? State of nature Probability Return Boom 20% 30% Average 70% 15% Recession 10% 5% b). A firm is evaluating two projects that are mutually exclusive with initial investments and cash flows as follows: Project A Project B Initial Investment End-of-Year Cash Flows Initial Investment End-of-Year Cash Flows RM40,000 RM 20,000 RM 90,000 RM 40,000 RM 20,000 RM...
The risk-free rate is currently at a 5% rate of return. A risk-averse investor with a...
The risk-free rate is currently at a 5% rate of return. A risk-averse investor with a risk aversion of A = 3 should invest entirely in a risky portfolio with a standard deviation of 18% only if the risky portfolio's expected return is at least
Exercise 2: The one-year risk-free rate is i1 = 5% and the two-year risk-free rate is...
Exercise 2: The one-year risk-free rate is i1 = 5% and the two-year risk-free rate is i2 = 5%. The probability of default for the first year is (1 − p1) = 10%. The marginal probability of default for the second year is (1 − p2) = 20%. a) Calculate the two-year cumulative probability of default (1 − Cp2). b) Calculate the one year corporate interest rate k1 and the corporate forward rate for the second year c2. c) Calculate...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT