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 $1,000,000 (CIA)?
1. Using the information given below, calculate a cross-rate
matrix for the UK pound, Japanese Yen, and European Euro in a
triangular matrix. Currency in US$UK pound 1.4655 Japan yen
0.010854 Euro area euro 1.2238
Calculate: a) UK pound per Japan yen
b) Japan yen per Euro area euro
2. A bank is quoting the following exchange rates against the
dollar for the pound and the Canadian dollar:£/$ = 0.6850C$/$ =
0.9629A Canadian firm asks the bank for an £/C$...
Suppose a bank is quoting the following for the Mexican Peso/$
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...
US policymakers' decisions to bring down the value of the
country's exchange rate, say from US$ 1 = 21 Mexican Peso today to
US$1 = 19 Mexican Peso, would tend to ____ the value of exports to
Mexico; thus, ____ the value of GDP in the United States.reduce ; reducingincrease ; reducingincrease ; increasingreduce ; increasingcannot be assessed based on information provided
The spot rate of Japanese Yen is 105 Yen per dollar. After one
year spot rate will be is 115 Yen per dollar. If you deposit
1000000 yen in one year saving account with 5% interest rate what
will be the dollar rate of return on deposit. Is there a interest
parity between Yen and dollar deposit?
1. (a) Assume that the exchange rate between
the U.S. dollar ($) and the Mexican peso (P) is pegged at ER=$1/P4.
Assume that, initially, this exchange rate corresponds to
equilibrium in the foreign exchange market. Illustrate the initial
situation in the market for peso-denominated deposits using demand
and supply curves.
(b) The United States now undertakes an
economic policy that puts upward pressure on the interest
rate on dollar-denominated deposits (i). Mexico follows an economic
policy that puts downward pressure...
The following questions concern the supply and demand for
Japanese yen. The exchange rate is denoted as E$/Yen.
For each question state whether the supply of yen, demand for yen
or both curves will shift, and in which direction.
a. Record Japanese audiences see the American film, Captain
Marvel.
b. U.S. tax cuts increase U.S. GDP
c. The Japanese central bank lowers interest rates
d. Toyota introduces a new electric car that sells well in the
U.S.
1. The following questions concern the supply and demand for
Japanese yen. The exchange rate is denoted as E$/Yen. For each
question state whether the supply of yen, demand for yen or both
curves will shift, and in which direction.
a. Record Japanese audiences see the American film, Captain
Marvel.
b. U.S. tax cuts increase U.S. GDP
c. The Japanese central bank lowers interest rates
d. Toyota introduces a new electric car that sells well in the
U.S.
e. The...
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
When there is an increase in the value of the Japanese yen, all
else equal:
A.American businesses will see a decrease in demand for their
goods in the United States only.
B.American businesses will see a decrease in demand for their
goods in the United States and in foreign countries.
C.American businesses will see a decrease in the supply of their
goods in the United States and in foreign countries.
D.American businesses will see an increase in demand for their...