Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 21, Problem 7QP
Interest Rates and Arbitrage [LO2] The treasurer of a major U.S. firm has $30 million to invest for three months. The interest rate in the United States is .31 percent per month. The interest rate in Great Britain is .34 percent per month. The spot exchange rate is £.573, and the three-month forward rate is £.575. Ignoring transaction costs, in which country would the treasurer want to invest the company’s funds? Why?
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Students have asked these similar questions
16. You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate is quoted
as $1.50 €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00. If a bank quotes
you a cross rate of £1.00 = €1.25, how much money can you make from arbitrage?
A. No arbitrage is possible.
B. $66,667
C. $62,500
D. $93,750
The treasurer of a major U.S. firm has $30 million to invest for three months. The interest rate in the United States is
15 percent per month. The interest rate in Great Britain is .26 percent per month. The spot exchange rate is £.813,
and the three-month forward rate is £.827. Ignore transactions costs.
a. If the treasurer invested the company's funds in the U.S., how much would the investment be worth after three
months?
Note: Do not round intermediate calculations and enter your answer in dollars, not millions of dollars,
rounded to 2 decimal places, 1,234,567.89.
b. If the treasurer invested the company's funds in Great Britain, how much would the investment be worth after
three months?
Note: Do not round intermediate calculations and enter your answer in dollars, not millions of dollars,
rounded to 2 decimal places, 1,234,567.89.
a. U.S. investment
b. Great Britain investment
3. Suppose that the treasurer of IBM can borrow $100,000,000 or its gbp
equivalent, and observes the following quotes: the 120-days interest rate is 8
percent per annum in the United States and 6 percent per annum in United
Kingdom. Currently, the spot exchange rate is $1.20 per gbp and the 120-days
forward exchange rate is $1.30 per gbp. Treasurer calculates possible future Spot
exchange rate (in 120 days) considering PPP with expected inflation rates of 4
percent per annum in the United States and 2 percent per annum in United
Kingdom. Calculate (if exists) Covered Interest Arbitrage and Uncovered Interest
Arbitrage. Explain differences between CIA and UIA.
Chapter 21 Solutions
Fundamentals of Corporate Finance
Ch. 21.1 - What are the differences between a Eurobond and a...Ch. 21.1 - Prob. 21.1BCQCh. 21.2 - Prob. 21.2ACQCh. 21.2 - Prob. 21.2BCQCh. 21.2 - Prob. 21.2CCQCh. 21.3 - Prob. 21.3ACQCh. 21.3 - Prob. 21.3BCQCh. 21.4 - Prob. 21.4ACQCh. 21.4 - Prob. 21.4BCQCh. 21.5 - What financial complications arise in...
Ch. 21.5 - Prob. 21.5BCQCh. 21.6 - Prob. 21.6ACQCh. 21.6 - How can a firm hedge short-run exchange rate risk?...Ch. 21.7 - Prob. 21.7ACQCh. 21.7 - Prob. 21.7BCQCh. 21 - Prob. 21.1CTFCh. 21 - Prob. 1CRCTCh. 21 - Prob. 2CRCTCh. 21 - Prob. 3CRCTCh. 21 - Prob. 4CRCTCh. 21 - Prob. 5CRCTCh. 21 - Prob. 6CRCTCh. 21 - Prob. 7CRCTCh. 21 - Prob. 8CRCTCh. 21 - Prob. 9CRCTCh. 21 - Prob. 10CRCTCh. 21 - Prob. 1QPCh. 21 - Prob. 2QPCh. 21 - Prob. 3QPCh. 21 - Using Spot and Forward Exchange Rates [LO1]...Ch. 21 - Cross-Rates and Arbitrage [LO1] Suppose the...Ch. 21 - Interest Rate Parity [LO2] Use Figure 21.1 to...Ch. 21 - Interest Rates and Arbitrage [LO2] The treasurer...Ch. 21 - Prob. 8QPCh. 21 - Prob. 9QPCh. 21 - Prob. 10QPCh. 21 - Prob. 11QPCh. 21 - Prob. 12QPCh. 21 - Prob. 13QPCh. 21 - Capital Budgeting [LO2] Lakonishok Equipment has...Ch. 21 - Capital Budgeting [LO2] You are evaluating a...Ch. 21 - Prob. 16QPCh. 21 - Prob. 17QPCh. 21 - Using the Exact International Fisher Effect [LO2]...Ch. 21 - SS Air Goes International Mark Sexton and Todd...Ch. 21 - SS Air Goes International Mark Sexton and Todd...Ch. 21 - SS Air Goes International Mark Sexton and Todd...Ch. 21 - SS Air Goes International Mark Sexton and Todd...Ch. 21 - Prob. 5M
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