e) Suppose that the current spot exchange is: 1 BP (British pound) = $1.21. Use the following interest rates. The interest rate is 8% in the US market (home market). The interest rate is 3% in the UK market (foreign market). iii) If the forward exchange rate is 1 euro = $1.23 (the IRP does not hold), from what market will you have more investment return (%)?

e) Suppose that the current spot exchange is: 1 BP (British pound) = $1.21. Use the following interest rates. The interest rate is 8% in the US market (home market). The interest rate is 3% in the UK market (foreign market). iii) If the forward exchange rate is 1 euro = $1.23 (the IRP does not hold), from what market will you have more investment return (%)?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter27: Multinational Financial Management

Section: Chapter Questions

Problem 7MC

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e) Suppose that the current spot exchange is: 1 BP (British pound) = $1.21. Use the following interest rates.The interest rate is 8% in the US market (home market).The interest rate is 3% in the UK market (foreign market).i) Find the forward exchange rate when the IRP holds.ii) Assume that the IRP holds (this means you use the IRP forward exchange rate found above). When you invest $10,000 in the UK market and at the same time, enter a currency forward contract to sell BP in a year under the assumption that the IRP holds, show that the return from your foreign investment is equal to the return that can be achieved from the US market (home market).iii) If the forward exchange rate is 1 euro = $1.23 (the IRP does not hold), from what market will you have more investment return (%)? Show your work. PLEASE SHOW STEPS
e) Suppose that the current spot exchange is: 1 BP (British pound) = $1.21. Use the following interest rates. The interest rate is 8% in the US market (home market). The interest rate is 3% in the UK market (foreign market). i) Find the forward exchange rate when the IRP holds.
e) Suppose that the current spot exchange is: 1 BP (British pound) = $1.21. Use the following interest rates. The interest rate is 8% in the US market (home market). The interest rate is 3% in the UK market (foreign market). ii) Assume that the IRP holds (this means you use the IRP forward exchange rate found above). When you invest $10,000 in the UK market and at the same time, enter a currency forward contract to sell BP in a year under the assumption that the IRP holds, show that the return from your foreign investment is equal to the return that can be achieved from the US market (home market).
Suppose that the current spot exchange is: 1 BP (British pound) = $1.21. Use the following interest rates.The interest rate is 8% in the US market (home market).The interest rate is 3% in the UK market (foreign market). i) Find the forward exchange rate when the IRP holds. ii) Assume that the IRP holds (this means you use the IRP forward exchange rate found above). When you invest $10,000 in the UK market and at the same time, enter a currency forward contract to sell BP in a year under the assumption that the IRP holds, show that the return from your foreign investment is equal to the return that can be achieved from the US market (home market). iii) If the forward exchange rate is 1 euro = $1.23 (the IRP does not hold), from what market will you have more investment return (%)? Show your work.
d) You observe the following exchange rates in the market. i) $1 = 0.85 euros and 1 krona = $ 0.13. Find the cross exchange rate between euro and krona, that is, how many euros do you receive for every krona exchanged?
Suppose you have the following spot exchange rates: USD/AUD 0.5300 AUD/EUR 1.6428 USD/EUR 0.8782 a) Calculate the US dollar profit (per 1 USD), if any, on a three-point arbitrage. b) Calculate AUD profit (per 1 AUD), if any, on a three-point arbitrage. c) How can you explain the answers in (1) and (2)?
Suppose that investors are risk-neutral and the linear UIP equation holds. You are given the following information: UK interest rate: i = 0.07 US interest rate: i* = 0.02 Expected future spot rate e^e = 8. What is the current spot rate, e? (State your answer as a number to 2 decimal places. Exchange rates are Pounds per Dollar, in natural logs)
α) Suppose that the annual interest rate of the Euro (€) is 2% and the annual interest rate of the US Dollar ($) is 1%. The current $/€ exchange rate is $1 = €1.10. The expected exchange rate from a European investor after one year is 1.10 5 (1$= 1.105€). Is there arbitrage margins from the point of view of a European investor provided that his expectation for the future exchange rate is verified? Show what this investor can do.
Suppose the current USD/EUR spot exchange rate is 1.20$/ €. At the same the euro interest rate amount to 10% per year while the dollar interest rate is 0% per year. a. What is the no-arbitrage one-year USD/EUR forward exchange? b. Suppose the one-year USD/EUR forward exchange was 1.25$/ €. How could you make money from this situation? 4
Suppose that the interest rates in the U.S. and Germany are equal to 5%, that the forward (one year) value of the € is F$/€ = 1$/€ and that the spot exchange rate is E$/€ = 0.75$/€. Please answer the following questions by explaining all steps of your analysis: Does the covered interest parity condition hold? Why or why not? How could you make a riskless profit without any money tied up assuming that there are no transaction costs in buying and or selling foreign exchange? PLEASE SHOW ALL STEPS
d) You observe the following exchange rates in the market.i) $1 = 0.85 euros and 1 krona = $ 0.13. Find the cross exchange rate between euro and krona, that is, how many euros do you receive for every krona exchanged?ii) 1 British pound (BP) = $1.12 and 1 euro = $1.04. Find the cross exchange rate between BP and euro, that is, how many euros do you receive for every BP exchanged? PLEASE SHOW STEPS
The next two questions are based on the following information Consider the following prices in the international money markets: Spot rate: USD1.275/GBP One-year Forward rate: USD1.364/GBP Interest Rate (UK): 2.39% Interest Rate (US): 11.66% Assuming no transaction costs, which of the following statements is true? An arbitrage can be obtained by borrowing in the currency that is expressing the other currency. An arbitrage can be obtained by investing in the currency that is expressing the other currency. An arbitrage can be obtained by borrowing in the currency that is being expressed by the other currency. O d. An arbitrage cannot be obtained by investing in the currency that is being expressed by the other currency. O e. None of the option in this question are correct. O a. O b. O c. What should the forward rate be for the International Fisher Effect to hold? GBP1.4875/USD GBP1.3904/USD USD1.3904/GBP d. USD1.4875/GBP O e. None of the options in this question. a. O b. Oc