QUESTION TWO a. Briefly evaluate the factors that may prevent the purchasing power parity from holding in real economies. b. Assume the following information: £ Spot rate = C5.20/€ 12-month forward rate = C6.00/£ C Interest rate = 26% per annum U.K. interest rate = 2% per annum i. Given the information above, does interest rate parity hold? What should be the 12- month forward rate, if interest rate parity holds? ii. How can an investor profit from this anomaly if she can easily borrow the equivalent of £1 million in either pounds or cedis to invest? How much profit can she make?

Question Il: Suppose that the exchange rate is $0.92/e. Let rs= 4%, and re= 3%, u = 1.2, d = 0.9, T = 0.75, number of binomial periods = 3, and K = $1.00 Use Binomial Option pricing to answer the following two questions. (a) What is the price of a 9-month European call? (b) What is the price of a 9-month American call?

Suppose current one-year interest rate in Europe is 5%, whereas one-year interest rate in the U.S. is 3%. Assume the current spot price of euro (EUR) is $1.10. Answer questions a) and b) below.       If the exchange rate movement is consistent with the international Fisher effect (IFE), what will the spot price of EUR in one year be?     Consider a trader who does not believe the IFE holds. The trader has decided to borrow $110,000 to invest in EUR-denominated deposits for one year without hedging. Recall the current EUR spot rate is $1.10. If the EUR spot rate in one year turns out to be $1.09, what will be the percentage return on this trading strategy?

Assume that spot rate of New Zealand dollar is AUD 0.64/NZD, the 1-year forward rate of New Zealand dollar is AUD 0.62/NZD, 1-year interest rate on NZD is 9% and 1-year interest rate on AUD is 6%. If there is a possible arbitrage opportunity, the appropriate arbitrage strategy should be and the rate of return from covered interest arbitrage would be arbitrage; %. Select one: a. Inward; 0.38 b. Outward; 9.42 c. Inward; 9.42 d. Outward; 0.38

2. If the current inflation rate is 3.6% and you have an investment opportunity that pays 10.9%, then what is the real rate of interest on your investment? Please use both exact formula and approximate formula.

It is given that dP/dt = rP (r being the annually compounded interest rate and P is the amount in the account at any given time).   Suppose that an account earns at an annual rate of r percent compounded continuously and a person is drawing an income of H dollars per year withdrawn continuously (impossible, but a modeling assumption). Use phase line analysis to analyze the behavior of the account. Discuss the meaning of any equilibrium points and their stability. If r = 10% (a reasonable rate for long-term stock investments), and H = $10,000, how long should an initial investment of $50,000 be left untouched so that when withdrawals begin the capital is not depleted?

This is part a) question and it's answer in order to answer part b) question Question: You hold a consol that pays a coupon C in perpetuity. The current interest rate is i, and the average expectation in the market is that this will remain unchanged. What will be the price of the consol today? answer : According to the question we need to calculate the current price of the perpetual consol. Perpetual consoles are priced differently because their expected income is spread through an indefinite period. So, perpetual consoles are priced using the current yield.  The current yield is calculated as:- coupon amountMarket price×100coupon amountMarket price×100 After calculating the current yield price is calculated by the above formula where, i = Current interest rate  y = yield so, the price of this consol will be  Price = i/y I please need the solutions for part b)  question b)  In the next period however, the interest rate changes unexpectedly to i . What is the new price of the bond? If…

Use the following information about today's U.S. Treasury STRIP yield curve to answer questions 19-21. One year spot rate Two year spot rate Three year spot rate 1.95 % p.a. 2.30% p.a. 2.45% p.a. 19. What is the market consensus expectation of one year spot rates for delivery one year from now? a. 1.95% p.a. b. 2.65% p.a. c. 2.70% p.a. d. 2.30% p.a. e. 2.75% p.a. 20. What is the market consensus expectation of one year spot rates for delivery two years from now? a. 1.95% p.a. b. 2.65% p.a. c. 2.70% p.a. d. 2.30% p.a. e. 2.75% p.a. 21. How is the one year spot rate expected to change over the next year? a. An increase of 8 basis points. b. An increase of 50 basis points. c. A decrease of 5 basis points. d. An increase of 70 basis points. e. An increase of 35 basis points.

Using the UIP equation, assume that the expected future rate (after one year) for euros (in terms of dollars) equals $1.20, while the current spot rate is 1.15. The current interest rate on euro deposits is 2%, and the interest rate on dollar deposits is 3%. Should you invest in the US or in Europe?   Neither one  In the US In Europe It is indifferent

Currently, you canexchange 1 euro for 1.25 dollars in the 180-dayforward market, and the risk-free rate on 180-daysecurities is 6% in the United States and 4% inFrance. Does interest rate parity hold? If not, whichsecurities offer the highest expected return?