2 Suppose that the current spot exchange rate is €0.8250/S and the three-month forward exchange rate is €0.8132/5. The three-month interest rate is 5.80 percent per annum in the United States and 5.40 percent per annum in France. Assume that you can borrow up to $1,000,000 or €825,000 Show how to realize a certain profit via covered interest arbitrage, assuming that you want to realize profit in terms of U.S. dollars. Also determine the size of your arbitrage profit

2 Suppose that the current spot exchange rate is €0.8250/S and the three-month forward exchange rate is €0.8132/5. The three-month interest rate is 5.80 percent per annum in the United States and 5.40 percent per annum in France. Assume that you can borrow up to $1,000,000 or €825,000 Show how to realize a certain profit via covered interest arbitrage, assuming that you want to realize profit in terms of U.S. dollars. Also determine the size of your arbitrage profit

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

J 4
Let's suppose you have $1 million to invest. You are considering to invest in UK first, then convert the British Pound back to US$ in the future. You know following information: Annual Interest rate on investment in US: 2% Annual Interest rate on investment in UK: 1% Investment period: 1 year Current exchange rate: 1.52 $/BP Forward exchange rate which you can apply when converting BP to US$: 1.53 $/BP What will be profit or loss if you apply the covered-interest arbitrage? (step by step answer please)
33 The law of volatility states that similar goods or commodities in different countries should remain at the same price after conversion of currencies according to current exchange rates. True or False True False
If a dollar can buy 98 Japanese yen and a British pound costs $1.50, how many yen would it take to buy £1? If a pound of copper costs £1 in Britain, ¥1,600 per pound in Tokyo, and $1.45 per pound in the United States, where is a pound of copper most expensive and where is it least expensive?
9. The relationships between demand and supply of the Olympios Dollar and the exchange rate with the Terranian Credit are given by the following functions: E = 8.75 -0.03Ds E = 0.02Ss- 3.50 where: E = Exchange rate: = price of Olympios dollar (Terranian credits / Olympios dollars) index of demand for Olympios dollar Ss = index of supply of Olympios dollar. Ds a) i) Determine the exchange rate that would prevail under a clean float. ii) Explain what this exchange rate would mean for the balance of payments of Olympios. b) The government of Olympios elects instead to fix the exchange rate with the Terranian credit at E=1.5 credits per dollar. i) Describe what actions the central bank will need to take in the short run to maintain this exchange rate, and the state of the balance of payments. ii) Explain what measures would be required if the government wishes to maintain this exchange rate in the long run.
5) Indicate whether each of the following creates a demand for or a supply of European euros in foreign exchange markets: a. Liberty purchases an Airbus plane assembled in France b. Mercedes-Benz decides to build an assembly plant in Knoxville c. A Liberty student decides to spend a year studying at the Sorbonne in Paris d. An Italian manufacturer ships machinery from Rome to Venice on an Egyptian freighter e. It is widely expected that the euro will depreciate in the near future
Suppose that the current spot exchange rate is 60.830/s and the three-month forward exchange rate is €0.815/S. The three-month interest rate is 6.00 percent per annum in the United States and 5.40 percent per annum in France. Assume that you can borrow up to $1,000,000 or 6830,000. Show how to realize a certain profit via covered interest arbitrage, assuming that you want to realize profit in terms of U.S. dollars. Also determine the size of your arbitrage profit
8. Why exchange rates matter Suppose that you go on vacation to Canada every summer. Last year, the hotel room where you stayed cost C$100 per night, and it costs the same this year. The exchange rate was 1.04 US$/C$ last year, and it is 0.95 US$/C$ this year. This means you will pay per night this year than you paid last year. The U.S. dollar-Canadian dollar exchange rate is essentially the price of a Canadian dollar in terms of U.S. dollars. When this price falls, the Canadian dollar is said to depreciate against the U.S. dollar. Thus, from your analysis, you can conclude that when the Canadian dollar depreciates against the U.S. dollar, Canadian goods and services become expensive for Americans. DeutschAuto is a German automaker that pays most of its production costs in euros. Suppose that in 2007, DeutschAuto's cost of producing a car was €23,000 and that the company sold a car in the United States for $36,000. Further, suppose that the dollar-euro exchange rate rose from 1.35$/ €…
3 In July 2021, a one-year Turkish bond had an interest rate of 18% and the exchange rate between the dollar and the Turkish lira was $1 = 8.68 lira. As of July 2022, the exchange rate has changed to $1 = 17.28 lira. Suppose an American invested $1000 in a one-year Turkish bond in July 2021. What rate of return would she have earned during the year (between July 2021 and July 2022)? Show all work
6
According to the uncovered interest parity theory, bond yields on riskless euro- denominated bonds being higher than the equivalent riskless bonds denominated in dollars predicts that The euro is going to decline in value relative to the dollar Euro-area interest rates need to stay higher than US interest rates. The euro is going to increase in value relative to the dollar Euro-area interest rates will decline to go below US interest rates.
8