The two-month interest rates with continuous compounding in Australia and the United States are 4.2% and 3.5% per annum, respectively. The spot exchange rate is currently priced at USD 0.780 per AUD. Given the two-month forward contract on the Australian dollars in the market is currenitly priced at USD 0.782 per AUD, which transactions should an investor take today in order to take advantages of this arbitrage opportunity? Select one Oa The forward is overpriced; the investor should sell the forward contract, borrow USD and lend AUD Ob The forward is underpriced; the investor should buy the forward contract, borrow USD and lend AUD Oc The forward is underpriced; the investor should buy the forward contract, borrow AUD, and lend USD Od. The forward is overpriced; the investor should sell the forward contract, borrow AUD and lend USD

The two-month interest rates with continuous compounding in Australia and the United States are 4.2% and 3.5% per annum, respectively. The spot exchange rate is currently priced at USD 0.780 per AUD. Given the two-month forward contract on the Australian dollars in the market is currenitly priced at USD 0.782 per AUD, which transactions should an investor take today in order to take advantages of this arbitrage opportunity? Select one Oa The forward is overpriced; the investor should sell the forward contract, borrow USD and lend AUD Ob The forward is underpriced; the investor should buy the forward contract, borrow USD and lend AUD Oc The forward is underpriced; the investor should buy the forward contract, borrow AUD, and lend USD Od. The forward is overpriced; the investor should sell the forward contract, borrow AUD and lend USD

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter22: International Financial Management

Section: Chapter Questions

Problem 2P

See similar textbooks

Similar questions

Currently, the spot exchange rate is $1.59 per £ and the three-month forward exchange rate is $1.61 per £. The three-month interest rate is 8.0% per annum in the U.S. and 5.8% per annum in the U.K. Assume that you can borrow as much as $1,590,000 or £1,000,000. Required: Determine whether the interest rate parity is currently holding. If the IRP is not holding, how would you carry out covered interest arbitrage? What will be your arbitrage profit? Explain how the IRP will be restored as a result of covered arbitrage activities.
Suppose that the current spot exchange rate is €0.80/$ and the three-month forward exchange rate is €0.7813/$. The three-month interest rate is 5.60 percent per annum in the United States and 5.40 percent per year in France. Assume that you can borrow up to $1,000,000 or €800,000. Assume that you want to realize profit in terms of euros. Determine the arbitrage profit in euros.
Assume interest rate parity (IRP). The nominal one-year rate in the USA will be 15%, and in Australia it will be 11% for one year. The Australian dollar (AUD) SPOT exchange rate is 0.45 USD/AUD. AUD 15 million will be required in one year. A one-year Australian dollar (AUD) forward contract is purchased today. How many US dollars (USD) will be used in one year to fulfill your forward contract?The alternatives area. Premium of 3.603604%, FWD exchange rate 0.466216216 AUD/USD and $6,993,243.24 USD to be needed.b. Premium of 3.603604%, FWD exchange rate 0.466216216 USD/AUD and $6,993,243.24 to be required. c. Discount of 3.478261%, FWD exchange rate 0.434347826 AUD/USD and $6,515,217.39 to be required.d. Discount of 3.478261%, FWD exchange rate 0.434347826 USD/AUD and $6,515,217.39 to be required.
) Suppose the spot exchange rate for the Hungarian Forint is HUF 209/USD. The infiation rate in the US is 3.5% per year and 5.7% in Hungary. What do you predict the exchange rate will be in two-years? _What is the-expected appreciation or depreciation of the USD over this period?
Suppose that the current spot exchange rate is €0.80/$ and the three-month forward exchange rate is €0.7813/$. The three-month interest rate is 5.60 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 €800,000. a. 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. b. Assume that you want to realize profit in terms of euros. Show the covered arbitrage process and determine the arbitrage profit in euros. 2. ATech has fixed costs of $7 million and profits of $4 million. Its competitor, ZTech, is roughly the same size and this year earned the same profits, $4 million. But it operates with fixed costs of $5 million and lower variable costs. a. Which firm has higher operating leverage? Hint: Use Degree of Operating Leverage (DOL), b. Which firm will likely have higher profits if the…
The current spot GBP/USD rate is 1.9455 and the three-month forward rate is 1.9173. Based on your analysis of the exchange rate, you are pretty confident that the spot exchange rate will be 1.9252 in three months. Assume that you would like to trade £5,000,000 in the forward market. What would be your speculative profit in dollar terms if the spot exchange rate actually turns out to be 1.9000. (USD, no cents)
Suppose that the current spot exchange rate is €0.830/S and the three-month forward exchange rate is €o.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 €830,000. 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.
Suppose that the current spot exchange rate is €0.85 per $ and the three-month forward exchange rate is €0.8313 per $. The three- month interest rate is 5.60 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 €850,000. Required: a. How will you realize a certain profit via covered interest arbitrage, assuming that you want to realize profit in terms of U.S. dollars? What will be the size of your arbitrage profit? b. Assume that you want to realize profit in terms of euros. Show the covered arbitrage process and determine the arbitrage profit in euros. How will you realize a certain profit and size of your arbitrage profit? Complete this question by entering your answers in the tabs below. Required A Required B How will you realize a certain profit via covered interest arbitrage, assuming that you want to realize profit in terms of U.S. dollars? What will be the size of your arbitrage profit? Note: Do not round…
One year borrowing and deposit interest rates are 12.5% and 10.5% respectively in the US and 10.5% and 8.5% respectively in Germany. The spot exchange rate for the US dollar is $1.50 to the EURO. The 12-month forward rate is $1.55i) Assuming you do not have any initial investment funds, suggest a way youmight profit from the pricing inconsistency presented above.ii) Will the situation persist forever? Explain your answer.
Currently, the USD/MXN rate is 19.5300 and the three-month forward exchange rate is 20.8400. The three-month interest rate is 3.3% per annum in the U.S. and 6.3% per annum in Mexico. Assume that you can borrow MXP10,000,000 or its equivalent in USD. How much do you make/lose if you borrow locally and invest abroad? (USD, no cents)
An investor has $10m to invest and has the following options: 1) depositing it in a US bank account paying 3% annually, or 2) depositing it in a German bank, where the annual rate of interest is only 2%. Assume that today the current spot exchange rate for the Euro is given as $1.2750, while the 1-year Dollar-Euro forward rate is posted as 1.2995. a. Based on your knowledge of the relationship between interest rate differentials and the current dollar-euro forward premium or discount, in which country should the investor deposit her money? why? b. If you had the power to adjust the German interest rate, with all else constant, what rate would you establish, such that the investor is totally indifferent between depositing in either countries? Show your work and the logic behind it.
Currently, the USD/MXN rate is 19.7800 and the six-month forward exchange rate is 20.1700. The six-month interest rate is 4.9% per annum in the U.S. and 6.2% per annum in Mexico. Assume that you can borrow MXP10,000,000 or its equivalent in USD. How much do you make/lose if you borrow the foreign currency and invest locally? (USD, no cents)