Cecilia who is a currency trader in Japan observes the following market conditions: • Annual interest rate in Japan: 1.5% per annum • Annual interest rate in France: 7.0% per annum • Current spot exchange rate: ¥ 114.4733/€ • One-year forward exchange rate: ¥ 110.2423/€ • No transaction costs If Cecilia can borrow ¥100,000,000, specific the transactions he may carry out in order to make some arbitrage profit and calculate the amount of the profit.

Cecilia who is a currency trader in Japan observes the following market conditions: • Annual interest rate in Japan: 1.5% per annum • Annual interest rate in France: 7.0% per annum • Current spot exchange rate: ¥ 114.4733/€ • One-year forward exchange rate: ¥ 110.2423/€ • No transaction costs If Cecilia can borrow ¥100,000,000, specific the transactions he may carry out in order to make some arbitrage profit and calculate the amount of the profit.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

ChapterP2: Part 2: Exchange Rate Behavior

Section: Chapter Questions

Problem 1Q

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Cecilia who is a currency trader in Japan observes the following market conditions: • Annual interest rate in Japan: 1.5% per annum • Annual interest rate in France: 7.0% per annum • Current spot exchange rate: ¥ 114.4733/€ • One-year forward exchange rate: ¥ 110.2423/€ • No transaction costs If Cecilia can borrow ¥100,000,000, specific the transactions he may carry out in order to make some arbitrage profit and calculate the amount of the profit. Step 1 1) Different i for Base rate -Quote rate = 2) Different between Spot and Forward = (1) + (2) = invest in _ borrow in _ Step 2 explain using table
Lee Junho who is a currency trader in Japan observers the following marketconditions:• Annual interest rate in Japan: 1.5% per annum• Annual interest rate in France: 7.0% per annum• Current spot exchange rate: ¥ 114.4733/€• One-year forward exchange rate: ¥ 110.2423/€• No transaction costs If Lee Junho can borrow ¥100,000,000, specific the transactions he may carryout in order to make some arbitrage profit and calculate the amount of theprofit
Jack Ma, a foreign exchange trader in Canada, has CAD. 4,000,000 for short-term money market investment and wants to make a profit based on the following rates. Explain specific steps that Jack Ma must take to make a covered interest arbitrage. CAD= Canadian Dollar JYP= Japanese Yen 6-month Canadian interest rate 1.6% per annum 6-month Yen interest rate 2.95% per annum Spot rate JYP 93.1395/CAD 6-month forward rate JYP 93.8380/CAD
Jack Ma, a foreign exchange trader in Canada, has CAD. 4,000,000 for short-term money market investment and wants to make a profit based on the following rates. Explain specific steps that Jack Ma must take to make a covered interest arbitrage. CAD= Canadian Dollar JYP= Japanese Yen 6-month Canadian interest rate 1.6% per annum 6-month Yen interest rate 2.95% per annum Spot rate JYP 93.1395/CAD 6-month forward rate JYP 93.8380/CAD Step 1 1) Different i for Base rate -Quote rate = 2) Different between Spot and Forward = (1) + (2) = invest in _ borrow in _ Step 2 explain using table
Emily Karlsen is a currency trader in Sydney and has 1 million Australian dollar (or the U.S. dollar equivalent) available. She considers 180 day arbitrage opportunities and retrieves the following current foreign exchange rates and interest rates: (Note that Australian dollar is regarded as the home currency.) Spot exchange rate in Sydney: $A1.1764/$US 6-month forward rate in Sydney: $A1.2575/$US U.S. dollar interest rate: 5.0 percent per annum Australian dollar interest rate: 7.0 percent per annum In the absence of transaction costs, is covered interest arbitrage (CIA) possible in the above case? If yes, calculate how much profit Emily Karlsen could make (annualized rate of return over her initial investment).
An investor has $2m to invest and has the option of placing it in a US bank account paying 2% annually, or in a German bank, where the annual rate of interest is only 2.5%. If the current exchange rate for the Euro is given as $1.4250, at what 1-year Dollar-Euro forward rate of exchange would the investor get the same return from investing in the US as he/she would by investing in Germany? Please show your work.