1. You
observed the bid rate of a New Zealand dollar is $.3325 while the ask rate is
$.3342 at Bank X. The bid rate of the New Zealand dollar is $.3232 while the
ask rate is $.3249 at Bank Y. What would be your dollar amount profit if you
use $2,000,000 to execute locational arbitrage?
2. The
following is market information:
Current
spot rate of pound
=
$1.47
90-day
forward rate of pound
=
$1.49
3-month
deposit rate in U.S.
=
1.1%
3-month
deposit rate in Great Britain
=
1.3%
If you
have $100,000 and use covered interest arbitrage for a 90-day investment, what
will be the amount of U.S. dollars you will have after 90 days?
3. Assume
the following information:
Current
spot rate of Australian dollar
=
$.90
Forecasted
spot rate of Australian dollar 1 year from now
=
$.88
1-year
forward rate of Australian dollar
=
$.91
Annual
interest rate for Australian dollar deposit
=
3%
Annual
interest rate in the U.S.
=
2%
What is
your percentage return from covered interest arbitrage with $500,000?
4.The
inflation rate in the U.S. is 3%, while the inflation rate in Japan is 2%. The
current exchange rate is $1 equal to 101 Japanese yen. If purchasing power
parity condition is existed, what is the new exchange rate for the yen?
5. The
interest rate in the U.K. is 2%, while the interest rate in the U.S. is 1.5%.
The spot rate for the British pound is $1.45. According to the international
Fisher effect (IFE), what is new level of the British pound?
6. Bronco
Co. is a U.S.-based MNC that has subsidiaries in Spain and Germany. Both
subsidiaries frequently remit their earnings back to the parent company. The
Spain subsidiary generated a net outflow of €1,000,000 this year, while the
German subsidiary generated a net inflow of €2,500,000. What is the net inflow
or outflow as measured in U.S. dollars this year? The exchange rate for the
euro is $1.27.
7. If
one-year nominal interest rate in the U.S. is 3%, while the one-year nominal
interest rate in Australia is 5%. The spot rate of the Australian dollar is
$.96. Interest Parity is held. You will need 5 million Australian dollars in
one year. Today, you purchase a one-year forward contract in Australian
dollars. How many U.S. dollars will you need in one year to fulfill your
forward contract?
8. Today,
the one-year U.S. interest rate is 2%, while the one-year interest rate in
Mexico is 6%. The spot rate of the Mexico peso (MXP) is $.08 The one-year
forward rate of the MXP exhibits a 11% discount. Determine the yield
(percentage return on investment) to an investor from Mexico who engages in
covered interest arbitrage.
9. Current
one-year interest rates in Europe is 2 percent, while one-year interest rates
in the U.S. is 1.5 percent. You convert $100,000 to euros and invests them in
France. One year later, you convert the euros back to dollars. The current spot
rate of the euro is $1.28.
a.
According to the IFE, what should the spot rate of the euro in one year be?
b.
If the spot rate of the euro in one year is $1.20, what is your percentage
return from your investment?
c.
If the spot rate of the euro in one year is $1.35, what is your percentage
return from your investment?
d.
What must the spot rate of the euro be in one year for your strategy to be
successful?
