Ve observe Fo> Sera-), where Fo is the direct forward exchange rate, Ta is the domestic risk-free rate, ry is the foreign riskfree rate, 7 is the maturity of the forward contract, So is the direct spot exchange rate. Choose an action from below to arbitrage: O At time 0, we convert the foreign currency we borrowed into domestic currency. At time 0, borrow 1000 foreign currency at r, for T. O Long forward: buy the foreign currency at Tat F, using domestic currency received from the domestic bank. O At time 0, borrow 1000 domestic currency at r for T.

Ve observe Fo> Sera-), where Fo is the direct forward exchange rate, Ta is the domestic risk-free rate, ry is the foreign riskfree rate, 7 is the maturity of the forward contract, So is the direct spot exchange rate. Choose an action from below to arbitrage: O At time 0, we convert the foreign currency we borrowed into domestic currency. At time 0, borrow 1000 foreign currency at r, for T. O Long forward: buy the foreign currency at Tat F, using domestic currency received from the domestic bank. O At time 0, borrow 1000 domestic currency at r for T.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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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
Let i be home interest rates, i* a foreign interest rates and p be the forward foreign exchange premium (=F/S-1). Assume there is a transaction cost equal to C incurred in any covered interest rate arbitrage. Write down the relation by which incentives are present for money to move from the foreign country to home.
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?
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). 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). 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).
2. Assume the following exchange rates: Currencies MXN/USD MXN/JPY JPY/USD Is triangular arbitrage possible? If so, how much is your profit in USD if you start with $1,000,000? Exchange Rate 0.0470 5.2300 0.0088
E) In this economy, the exchange rate is related to per capita income, interest rate, inflation rate and unemployment rate as Exchange=800+inflation rate-(inflation rate)2+0.001×per capita income+Interest rate+Interest rate2+0.11xUnemployment rate i. Define exchange rate and explain the difference between flexible exchange rate and dirty-float exchange systems (2%) ii. Mention two advantages associated with each system of exchange rate explained above (2%)
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.
2. Suppose you observe the following exchange rates: €1 = $1.25; £1 = $2.00. Calculate the £/€ cross rate and €/£ cross rate
If the exchange rate at time t is Et = €1/$. You invest $1 in an euro asset at t, which has an interest of 8%. When the asset expires at t+1, you get paid € (x.xx round to two decimal places). If dollar appreciates by 2 % against euro, that is, Et+1 /$(x.xx round to two decimal places), then you can buy back $ (x.xx round UP to two decimal places). Blank # 1 Blank # 2 Blank # 3 MacBook Pro |米 G Search or type URL %24 & 7 80 09
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

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