Assume that annual interest rates are 4 percent in the United States and 3 percent in...

a. If the forward rate is $0.6735/TL, how could the bank arbitrage using a sum of $7 million? What is the spread earned? (Do not round intermediate calculations. Round your answer to 4 decimal places. (e.g., 32.1616))

b. At what forward rate is this arbitrage eliminated? (Do not round intermediate calculations. Round your answer to 5 decimal places. (e.g., 32.16161))

Solutions

Expert Solution

jeff jeffy answered 5 months ago

Next > < Previous

Related Solutions

Assume that annual interest rates are 4 percent in the United States and 3 percent in...

Assume that annual interest rates are 4 percent in the United States and 3 percent in Turkey. An FI can borrow (by issuing CDs) or lend (by purchasing CDs) at these rates. The spot rate is $0.6652/Turkish lira (TL). a. If the forward rate is $0.6735/TL, how could the bank arbitrage using a sum of $9 million? What is the spread earned? (Do not round intermediate calculations. Round your answer to 4 decimal places. (e.g., 32.1616)) Spread earned % b....

6. Assume that annual interest rates are 5 percent in the United States and 4 percent...

6. Assume that annual interest rates are 5 percent in the United States and 4 percent in Turkey. An FI can borrow (by issuing CDs) or lend (by purchasing CDs) at these rates. The spot rate is $0.6624/Turkish lira (TL). a. If the forward rate is $0.6735/TL, how could the bank arbitrage by using a sum of $5 million? What is the spread earned? b. At what forward rate is this arbitrage eliminated?

Assume that annual interest rates are 8 percent in the United States and 7 percent in...

Assume that annual interest rates are 8 percent in the United States and 7 percent in Turkey. An FI can borrow (by issuing CDs) or lend (by purchasing CDs) at these rates. The spot rate is $0.6571/Turkish lira (TL). a. If the forward rate is $0.6735/TL, how could the bank arbitrage using a sum of $8 million? What is the spread earned? (Do not round intermediate calculations. Round your answer to 4 decimal places. (e.g., 32.1616)) b. At what forward...

Suppose that the annual interest rate is 3 percent in the United States and 4 percent...

Suppose that the annual interest rate is 3 percent in the United States and 4 percent in Germany, and that the S(EUR/USD) = $1.60 and the forward exchange rate, with one-year maturity, is F12(EUR/USD ) = $1.57. Assume that an arbitrager can borrow up to $10,000,000 or €6,250,000. If an astute trader finds an arbitrage opportunity, what is the net cash flow in one year? (Show each step and the values)

1. Assume that annual interest rates in the U.S. are 3 percent, while interest rates in...

1. Assume that annual interest rates in the U.S. are 3 percent, while interest rates in Japan are 6 percent. Assume that the current spot rate is ¥100/$. Suppose the U.S. risk-free interest rate has been steadily rising from 2% 3 years ago to 5% currently. The Euro interest rate has remained constant over the same time period at 6%, what should be happening to the Euro’s forward premium/discount? What is the impact of an appreciation of the USD on...

2. Suppose that the annual interest rate is 2.0 percent in the United States and 4...

2. Suppose that the annual interest rate is 2.0 percent in the United States and 4 percent in Germany, and that the spot exchange rate is $1.60/€ and the forward exchange rate, with one-year maturity, is $1.58/€. Assume that an arbitrager can borrow up to $1,000,000 or €625,000 a. Determine whether the interest rate parity is currently holding. b. If the IRP is not holding, how would you carry out covered interest arbitrage? Show all the steps and determine the...

Assume that annual interest rates in the U.S. are 4.5 percent, while interest rates in U.K....

Assume that annual interest rates in the U.S. are 4.5 percent, while interest rates in U.K. are 3.2 percent. According to IRP (using the exact formula), what should the forward rate premium or discount of the BP (British Pound) be? If the BP’s spot rate is $1.3067, what should the one-year forward rate of the British pound be? (3 points)

Suppose that the annual interest rate is 5.0 percent in the United States and 3.5 percent...

Suppose that the annual interest rate is 5.0 percent in the United States and 3.5 percent in Germany, and that the spot exchange rate is $1.12/€ and the forward exchange rate, with oneyear maturity, is $1.16/€. Assume that an arbitrager can borrow up to $1,000,000 or € 892,857.14 a) Show how to realize a certain profit via covered interest arbitrage. b) Using given spot rate answer what is the one-year forward rate that should prevail if rates of inflation expected...

Suppose interest rates in the United States, but they don’t rise in other nations. As a...

Suppose interest rates in the United States, but they don’t rise in other nations. As a result of this change The U.S. dollar appreciates The U.S. dollar depreciates U.S. exports will increase U.S. imports will decrease Price levels in the unites states will increase Suppose Americans began purchasing real assets in Europe. How would this impact the foreign exchange market for the euro and the dollar price of the euro? Decrease/increase Increase/ decrease Increase/increase Decrease/Decrease Decrease/Not change Suppose interest rates...

The interest rates given in the assignment are annual percentage rates. 1. Assume that starting on...

The interest rates given in the assignment are annual percentage rates. 1. Assume that starting on December 31, 2020, you deposit $2,800 in the bank and that you continue to deposit $2,800 every December 31st through December 31, 2050 (a total of 30 deposits). You are able to earn 4% interest per year. How much money will you have saved by December 31, 2050 after making the final deposit? (Hint: I recommend that you use the FV formula in Excel...

Subjects