Question

In: Finance

Robert is considering an investment opportunity based on the information provided in the table below. Explain...

Robert is considering an investment opportunity based on the information provided in the table below. Explain the steps she has to undertake in order to earn a risk-free profit by engaging in a forward contract.

USD 6-month risk free rate 2.45%
EUR 6-month risk free rate 3.60%
EUR/USD Spot exchange rate 1.1278
EUR/USD 6-month forward rate 1.1480

Solutions

Expert Solution

1) The 6 month forward premium for the USD = 1.1480/1.1278-1 = 1.79%
2) Interest rate differential = 3.60%-2.45% = 1.15%
3) As the 6 month forward premium is not equal to
the 6 month interest rate differential, there is
scope for covered interest rate arbitrage.
4) As the interest rate differential is less than the
forward premium, borrowing should be made in
the currency having higher interest rate and the
investment should be made in the currency having
lower interest rate.
Steps to be taken on Day 1 are:
*Borrow in euro at 3.60% for 6 months
*Convert the borrowed in euros into $ at the spot
rate of 1.1278.
*Invest the dollars so got at 2.45% for 6 months.
*Enter into a 6 month forward contract to sell the
dollars invested in the previous step (including
interest at 2.45%)
Steps to be taken after 6 months are:
*Realize the dollar deposit along with interest
*Convert it into euros at the forward contract rate
*Pay the euro loan along with interest using the
euros got in the previous step.
*The euros remaining after repaying the loan with
interest is the profit from the covered interest rate
arbitrage.

jeff jeffy answered 8 months ago
Next > < Previous

Related Solutions

Emma and Robert are discussing an investment opportunity about the stock XYZ. The stock has a...
Emma and Robert are discussing an investment opportunity about the stock XYZ. The stock has a current price of €100 and the forward price for delivery of this stock in 1 year is €110. The annual effective risk-free interest rate is 5%. This stock currently pays no dividends. Read the following discussions about the contract. Do you support them or not? Justify your answers. i. Emma argues that investing in XYZ stock versus investing in the forward contract does not...
Overall Planning Materiality Based on the information provided below. a. Explain why ABC's auditor chose Sales...
Overall Planning Materiality Based on the information provided below. a. Explain why ABC's auditor chose Sales as a Measurement Benchmark in planning Wesly Co. Audit for the year 2018. b. Explain why ABC's auditor chose Total Assets as a Measurement Benchmark in planning Wesly Co. Audit for the year 2018. c. Explain why ABC's auditor chose Gross Profit as a Measurement Benchmark in planning Wesly Co. Audit for the year 2018. Account 12/31/2018 Balance (projected) 12/31/2017 Balance          (audited) 12/31/2016 Balance     ...
Based on the ion concentrations provided in the table below, which of the following would result...
Based on the ion concentrations provided in the table below, which of the following would result in an EPSP? Select all that apply. Ion Intracellular fluid Extracellular fluid [Na+] 15mM 140mM [K+] 130mM 4mM [Cl-] 5mM 120mM [Ca2+] <0.001mM 1.2mM A) Sodium channels open B) Potassium channels open C) Chloride channels open D) Calcium channels open
Refer to the information provided in Table below to answer the questions that follow. Employed 148,297...
Refer to the information provided in Table below to answer the questions that follow. Employed 148,297 Unemployed 8,705 What is the number of labor force What is the rate of unemployment What is the cost of unemployment (Explain just one point)? Why high rate of unemployment can be considered as one of biggest issues for the economy.?
You are considering investing in one of Fidelity's mutual funds. Based on the information provided in...
You are considering investing in one of Fidelity's mutual funds. Based on the information provided in the prospectus, you believe the expected return of this Fidelity fund is 0.12 and its expected standard deviation is 0.32. Assume Treasury bill (risk-free security) currently returns 0.03 per year and you have estimated that your risk aversion coefficient, A, is 4. What is the optimal weight, y*, of this Fidelity mutual fund (risky portfolio) in your final complete portfolio? (The optimal weight refers...
Suppose that you are contemplating an investment in an apartment building. Use the information provided below...
Suppose that you are contemplating an investment in an apartment building. Use the information provided below to answer the questions that follow: Type of Property: Apartment Building Number of Units: 30 Average Rent: $1,500 per unit per month Expected Growth in Rents: 5% per year Vacancy and Collection Losses: 5% of Potential Gross Income Other Income: $50 per unit per month Expected Growth in Other Income: 3% per year Operating Expenses: 35% of Effective Gross Income Capital Expenditures: 4% of...
Suppose that you are contemplating an investment in an apartment building. Use the information provided below...
Suppose that you are contemplating an investment in an apartment building. Use the information provided below to answer the questions that follow: Type of Property: Apartment Building Number of Units: 30 Average Rent: $1,500 per unit per month Expected Growth in Rents: 5% per year Vacancy and Collection Losses: 5% of Potential Gross Income Other Income: $50 per unit per month Expected Growth in Other Income: 3% per year Operating Expenses: 35% of Effective Gross Income Capital Expenditures: 4% of...
Suppose that you are contemplating an investment in an apartment building. Use the information provided below...
Suppose that you are contemplating an investment in an apartment building. Use the information provided below to answer the questions that follow: Type of Property: Apartment Building Number of Units: 30 Average Rent: $1,500 per unit per month Expected Growth in Rents: 5% per year Vacancy and Collection Losses: 5% of Potential Gross Income Other Income: $50 per unit per month Expected Growth in Other Income: 3% per year Operating Expenses: 35% of Effective Gross Income Capital Expenditures: 4% of...
Suppose that you are contemplating an investment in an apartment building. Use the information provided below...
Suppose that you are contemplating an investment in an apartment building. Use the information provided below to answer the questions that follow: Type of Property: Apartment Building Number of Units: 30 Average Rent: $1,500 per unit per month Expected Growth in Rents: 5% per year Vacancy and Collection Losses: 5% of Potential Gross Income Other Income: $50 per unit per month Expected Growth in Other Income: 3% per year Operating Expenses: 35% of Effective Gross Income Capital Expenditures: 4% of...
Based on the information provided below, estimate the income and expenditure and prepare a basic budget...
Based on the information provided below, estimate the income and expenditure and prepare a basic budget in the template provided. The Melbourne Football Club and the recreational centre has the following income and expenditure. Identify each item as income or expenditure and fill in the template provided to get total income and expenditure for the year. Assume one (1) season of the game per year. Sales: The number of opening hours per week: 14 The average sales per hour: $120...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT