Vicky Gomez, a foreign exchange trader at Wells Fargo, can invest $1M, or the foreign currency equivalent of the bank's short term funds, in an uncovered or covered interest arbitrage with the United Kingdom. Arbitrage funds available to invest: $1M( or the equivalent in pounds) Spot rate ($/Ł) : 1.9422 90-day forward exchange rate ($/Ł): 1.9150 Expected 90-day spot exchange rate ($/Ł): 1.8810 U.S. dollar 90-day interest rate: 2.000% U.K. pound 90-day interest rate: 5.900% A.Should Vicky make an covered investment in the UK? Show work and give answer. B. Shoudl Vicky make an uncovered investment in the UK? Show work and give answer.
Vicky Gomez, a foreign exchange trader at Wells Fargo, can invest $1M, or the foreign currency equivalent of the bank's short term funds, in an uncovered or covered interest arbitrage with the United Kingdom. Arbitrage funds available to invest: $1M( or the equivalent in pounds) Spot rate ($/Ł) : 1.9422 90-day forward exchange rate ($/Ł): 1.9150 Expected 90-day spot exchange rate ($/Ł): 1.8810 U.S. dollar 90-day interest rate: 2.000% U.K. pound 90-day interest rate: 5.900% A.Should Vicky make an covered investment in the UK? Show work and give answer. B. Shoudl Vicky make an uncovered investment in the UK? Show work and give answer.
ChapterP2: Part 2: Exchange Rate Behavior
Section: Chapter Questions
Problem 1Q
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Vicky Gomez, a foreign exchange trader at Wells Fargo, can invest $1M, or the foreign currency equivalent of the bank's short term funds, in an uncovered or covered interest arbitrage with the United Kingdom.
Arbitrage funds available to invest: $1M( or the equivalent in pounds)
Spot rate ($/Ł) : 1.9422
90-day forward exchange rate ($/Ł): 1.9150
Expected 90-day spot exchange rate ($/Ł): 1.8810
U.S. dollar 90-day interest rate: 2.000%
U.K. pound 90-day interest rate: 5.900%
A.Should Vicky make an covered investment in the UK? Show work and give answer.
B. Shoudl Vicky make an uncovered investment in the UK? Show work and give answer.
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