Submitted by: Submitted by yuyang1992
Views: 10
Words: 262
Pages: 2
Category: English Composition
Date Submitted: 01/07/2016 08:20 AM
ECS3350 Seminar 6
1. Suppose you observe a spot exchange rate of $1.50/€. If interest rates are 5% APR in the U.S. and 3% APR in the euro zone, what is the no-arbitrage 1-year forward rate?
2. If the Swiss franc is $0.68 on the spot market and the 180-day forward rate is $0.70, what is the annualized interest rate in the United States over the next six months? Assume the annualized interest rate in Switzerland is 2%.
3. Currently, the spot exchange rate is $1.50/£ and the three-month forward exchange rate is $1.52/£. 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 $1,500,000 or £1,000,000.
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? Show all the steps and determine the arbitrage profit.
c. Explain how the IRP will be restored as a result of covered arbitrage activities.
4. Suppose that annualized interest rates in Japan and the United States are 7 percent and 9 percent, respectively. If the spot rate is ¥142:$1 and the 90-day forward rate is ¥139:$1:
a. Where would you invest?
b. Where would you borrow?
c. What arbitrage opportunity do these figures present?
d. Assuming no transaction costs, what would be your arbitrage profit per dollar or dollar-equivalent borrowed?