Fundamentals of Financial Management, Concise Edition (MindTap Course List)
9th Edition
ISBN: 9781305635937
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Chapter 17, Problem 3P
Summary Introduction
To determine: The 6-month forward exchange rate.
Introduction:
Interest Rate Parity:
It refers to that theory which indicates the difference of interest rates provided by two different countries to be the same as the difference of forward exchange rate and spot exchange rate.
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The nominal yield on 6-month T-bills is 6%, while default-free Japanese bonds that mature in 6 months have a nominal rate of 3%. In the spot exchange market, 1 yen equals $0.011. If interest rate parity holds, what is the 6-month forward exchange rate? Do not round intermediate calculations. Round your answer to five decimal places.
Six-month T-bills have a nominal rate of 3%, while default-free Japanese bonds that mature in 6 months have a nominal rate of 1.50%. In the spot
exchange market, 1 yen equals $0.008. If interest rate parity holds, what is the 6-month forward exchange rate? Do not round intermediate calculations.
Round your answer to six decimal places.
A
The following current rates have been observed:
Spot exchange rate: $1.25/SFr
Expected future spot rate in 90 days: $1.2625/SFr
Annual interest rate on 90-day U.S.-dollar-denominated bonds: 12%
Annual interest rate on 90-day SFr-denominated bonds: 4%
(i) At these initial rates, does uncovered interest parity hold? Why?
(ii) What spot exchange rate will be consistent with uncovered interest parity?
Chapter 17 Solutions
Fundamentals of Financial Management, Concise Edition (MindTap Course List)
Ch. 17 - Why do U.S. corporations build manufacturing...Ch. 17 - If the euro depredates against the U.S. dollar,...Ch. 17 - Prob. 3QCh. 17 - Should firms require higher rates of return on...Ch. 17 - Prob. 5QCh. 17 - Prob. 6QCh. 17 - Prob. 7QCh. 17 - Prob. 1PCh. 17 - Prob. 2PCh. 17 - Prob. 3P
Ch. 17 - Prob. 4PCh. 17 - Prob. 5PCh. 17 - Prob. 6PCh. 17 - CURRENCY APPRECIATION Suppose that 1 Danish krone...Ch. 17 - Prob. 8PCh. 17 - Prob. 9PCh. 17 - INTEREST RATE PARITY Assume that interest rate...Ch. 17 - PURCHASING POWER PARITY in the spot market, 15.4...Ch. 17 - Prob. 12PCh. 17 - SPOT AND FORWARD RATES Arvin Australian Imports...Ch. 17 - Prob. 14PCh. 17 - RESULTS OF EXCHANGE RATE CHANGES Early in June...Ch. 17 - FOREIGN INVESTMENT ANALYSIS After all foreign and...Ch. 17 - FOREIGN CAPITAL BUDGETING Sandrine Machinery is a...Ch. 17 - MULTINATIONAL FINANCIAL MANAGEMENT Yohe...Ch. 17 - MULTINATIONAL FINANCIAL MANAGEMENT Citrus Products...Ch. 17 - DISCUSSION QUESTIONS Recreate Table 17.1 for the...Ch. 17 - Prob. 2DQCh. 17 - Some of the websites show graphs indicating how...Ch. 17 - Prob. 4DQ
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- Currently, the spot exchange rate is $1.67 per £ and the three-month forward exchange rate is $1.69 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 $1,670,000 or £1,000,000. Required: a. Determine whether the interest rate parity is currently holding. b. If the IRP is not holding, how would you carry out covered interest arbitrage? What will be your arbitrage profit? c. Explain how the IRP will be restored as a result of covered arbitrage activities. Complete this question by entering your answers in the tabs below. Required A Required B Required C Determine whether the interest rate parity is currently holding. Determine whether the interest rate parity is currently holding.arrow_forwardAn exchange rate is 0.7000 and the six‐month domestic and foreign risk‐free interest rates are 5% and 7% (both expressed with continuous compounding). What is the six‐month forward rate? a) 0.7070 b) 0.7177 c) 0.7249 d) 0.6930arrow_forwardCurrently, the spot exchange rate is $1.51 per £ and the three-month forward exchange rate is $1.53 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 $1,510,000 or £1,000,000. Required: a. Determine whether the interest rate parity is currently holding. b. If the IRP is not holding, how would you carry out covered interest arbitrage? What will be your arbitrage profit? c. Explain how the IRP will be restored as a result of covered arbitrage activities. Complete this question by entering your answers in the tabs below. Required A Required B Required C If the IRP is not holding, how would you carry out covered interest arbitrage? What will be your arbitrage profit? Note: Do not round intermediate calculations. Interest arbitrage Arbitrage profit Borrow in the U.S. and invest in the U.K. Hedge exchange rate risk by selling British pounds forward. < Required A Required Carrow_forward
- Currently, the spot exchange rate is $1.56 per £ and the three-month forward exchange rate is $1.58 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 $1,560,000 or £1,000,000. Required: Determine whether the interest rate parity is currently holding. If the IRP is not holding, how would you carry out covered interest arbitrage? What will be your arbitrage profit? Explain how the IRP will be restored as a result of covered arbitrage activities.arrow_forwardSuppose that the annual interest rates on 6-months borrowing in Romania and the United States are 12.7 % and 0.8 %, respectively. The current spot rate RON/US$ is 4.00 and 6-months forward rate RON/US$ is 4.21. Does interest rate parity hold?arrow_forward
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