Suppose the interest rate on investments in GBP is 12% in London and the interest rate for comparable investments in USD in New York is 7%. Suppose further, that the spot rate is USD 1.95 /GBP and that the one-year forward rate is USD 1.87 /GBP a) Is the covered interest parity violated? Is there an arbitrage opportunity? b) If yes, how high is it if you were able to borrow USD 1 million from a US-based bank?

Consider an Australian investor who borrows money in pounds from a UK bank at an interest rate of 3.9 per cent, in order to buy Australian shares. After one year, the shares have increased in price by 5 per cent, while the Australian dollar has appreciated against the pound by 4 per cent. If the investor then sells the shares and repays the loan and interest, what is the approximate net gain or loss expressed as a percentage of the original amount borrowed? (Assume the shares have paid no dividends.) 1.1 per cent O 5.1 per cent O-2.9 per cent O 12.9 per cent

Suppose that the nominal interest rate in the euro area is 2%, and the nominal interest rate in Switzerland is 4%. Suppose inflation is expected to be 0.5% in the euro area. If the Fisher Effect holds, then the real interest rate in the euro area is approximately the expected inflation in Switzerland is O2%; impossible to determine. 1.5%; 2.5% 2.5%; 0.5% None of the above is correct. 1.5%; 0.5% and

Foreign Exchange Risk and the Cost of Borrowing Swiss Francs. The chapter demonstrated that a firm borrowing in a foreign currency could potentially end up paying a very different effective rate of interest than what it expected. Using the same baseline values of a debt principal of SF1.5 million, a one-year period, an initial spot rate of SF1.4700/5. a 5.148% cost of debt, and a 34% tax rate, what is the effective after-tax cost of debt for one year for a U.S. dollar-based company if the exchange rate at the end of the period was a. SF14700/$ b. SF1.4300/5 c. SF1.3980/ d. SF1.6050/5 GULD a. If the exchange rate at the end of the period was SF1.4700/5, what is the effective after-tax cost of debt? % (Round to four decimal places)

Foreign Exchange Risk and the Cost of Borrowing Swiss Francs.  The chapter demonstrated that a firm borrowing in a foreign currency could potentially end up paying a very different effective rate of interest than what it expected. Using the same baseline values of a debt principal of SF 1.6 ​million, a​ one-year period, an initial spot rate of SF​ 1.4600/$, a 4.934​% cost of​ debt, and a ​38% tax​ rate, what is the effective​ after-tax cost of debt for one year for a U.S.​ dollar-based company if the exchange rate at the end of the period​ was: a. 1.4600SF​/$ b. 1.4000SF​/$ c. 1.3350SF​/$ d. 1.5730SF​/$

Assume interest rates in the US are at 1.5% per year, and interest rates in Israel are at 6% per year, and that the shekel is trading at 4 sheckels/dollar. If the two-year forward rate on sheckels is 4.3 sheckels/dollar, do you want to invest in dollars or sheckels to maximize your returns for the next two years? How much would you make in arbitrage profits if you can borrow $10,000,000 or an equivalent amount of sheckels over this time period?   What sheckel/dollar forward rate implies no arbitrage?

The spot rate: USD 1.21/EUR 2-year USD YTM=0.11% 2-year EUR YTM= -0.72%. Suppose that you invest in the strategy known as the "carry trade". What will be your profit/loss if the spot rate in 2 years is USD 1.00/EUR. PROFIT = $1,100 or THERE IS NO ARBITRAGE OPPORTUNITY IS AN INCORRECT ANSWER

Assume Sweden has policy interest rate of 4.3% and the real interest rate is 2%. If the interest rate rises to 6% while the real interest rate remains unchanged, what should be the impact on the Swedish Krona?   Question 18 options:   It should appreciate   We do not have enough information to answer the question   It should depreciate   It should remain unchanged

The next problem is about covered interest rate parity. Assume that the home country is the Philippines, and a Filipino investor is mulling whether or not to invest P1 million in the US or in the PH. Bonds in either country mature in just 1 year. The initial parameters are as follows: iPH ius = = 8% ● et+1 = 12% • et P50/USD = P55/USD Answer the following: • If the Filipino invests in a PH bond for 1 year, how much will she earn? • If the Filipino invests in a US bond for 1 year, how much will she earn in peso terms? • Is there a difference between the two values above? • How much did the peso depreciate/appreciate from time t to t + 1? • For the investor to be indifferent between investing here and abroad, she should engage in a forward exchange rate contract at what rate Fț?

Part 1 Assume that interest rate parity holds. The risk-free interest rate is 5% in the U.S. and 6% in Switzerland. Which statement is true? Using covered interest arbitrage, a U.S. investor can earn a return of 6%. Using covered interest arbitrage, a Swiss investor can earn a return of 5%. Using interest rate parity, a Swiss investor can earn a return of 5%. Using interest rate parity, a U.S. investor can earn a return of 6%. None of the other statements is true. Submit Try again