In a recent e-news, you observe that the 6-month forward rate is $1.5031/Euro. Further, if you invest the dollar, it fetches you interest at the rate of 2% p.a. In comparison, the interest rate in Eurozone is 1% p.a. You also see that CAD 1.5513 are needed to purchase a Euro and CAD 1.332 are needed to buy a US$. Is it possible for you to make an arbitrage profit? If so, which arbitrage strategies will you employ and what will be the profit? Assume that interest rate parity holds and you have one million dollars available to conduct arbitrage.

In a recent e-news, you observe that the 6-month forward rate is $1.5031/Euro. Further, if you invest the dollar, it fetches you interest at the rate of 2% p.a. In comparison, the interest rate in Eurozone is 1% p.a. You also see that CAD 1.5513 are needed to purchase a Euro and CAD 1.332 are needed to buy a US$. Is it possible for you to make an arbitrage profit? If so, which arbitrage strategies will you employ and what will be the profit? Assume that interest rate parity holds and you have one million dollars available to conduct arbitrage.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter22: International Financial Management

Section: Chapter Questions

Problem 1P

See similar textbooks

Similar questions

Suppose that the exchange rate is 0.60 dollars per Swiss franc. If the franc appreciates 10% against the dollar, how many francs would a dollar buy tomorrow?
If euros sell for 1.50 (U.S.) per euro, what should dollars sell for in euros per dollar?
You have called your Forex dealer and asked for quotations USD/EUR on the spot, 1 month, 3-month and 6-month forward rates. The trader has responded with the following: USD 1.284/98 3/5 8/7 13/10 What does this mean in terms of dollars per euro? If you wished to buy spot euros, how much would you pay in dollars? If you wanted to purchase spot USD, how much would you have to pay in euro?
An investor has $10m to invest and has the following options: 1) depositing it in a US bank account paying 3% annually, or 2) depositing it in a German bank, where the annual rate of interest is only 2%. Assume that today the current spot exchange rate for the Euro is given as $1.2750, while the 1-year Dollar-Euro forward rate is posted as 1.2995. a. Based on your knowledge of the relationship between interest rate differentials and the current dollar-euro forward premium or discount, in which country should the investor deposit her money? why? b. If you had the power to adjust the German interest rate, with all else constant, what rate would you establish, such that the investor is totally indifferent between depositing in either countries? Show your work and the logic behind it.
The Swiss Franc is trading at 1.1106 $/SFr, the euro is trading at 1.1268 $/euro. If you can buy or sell SFr/euro at 1.0160, is there an arbitrage? If so, how much can you make with one round-trip using $1,000,000?
BIDV can borrow either AUD10 million or $5 million. The current spot rate of the AUD is $0.48 and AUD will increase to $0.5 in the next 5 days. Furthermore, BIDV expects the spot rate of the euro to be $1.10 in 90 days. Today, U.S. Dollar ($) lending rate is 7.10% and borrowing rate is 7.50%. On the other hand, AUD lending rate is 6.80% and borrowing rate is 7.25%. If BIDV's forecast is correct, what will its dollar profit be from speculation over the five-day period? (assuming it does not use any of its existing consumer deposits to capitalize on its expectations) (Write down the number only, no currency symbol, round up to 0 decimal number, assume that 1 year has 360 days)
Suppose that the current EUR/GBP rate is 0.6674 and the one-year forward exchange rate is 0.6748. The one-year interest rate is 1.4% in euros and 3.4% in pounds. You can borrow at most €1,000,000 or the equivalent pound amount. Suppose you are a Euro-based investor. Determine the profit/loss (in EUR, no cents) if you borrow locally and invest in pounds
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?
Suppose that the current EUR/GBP rate is 0.6668 and the one-year forward exchange rate is 0.6742. The one-year interest rate is 1.8% in euros and 3.6% in pounds. You can borrow at most €1,000,000 or the equivalent pound amount. Suppose you are a pound-based investor. Determine the profit/loss (in GBP, no cents) if you borrow locally and invest in Euros.
Suppose that the exchange rate is $0.92/Euro. The dollar-denominatedinterest rate is 4% and the euro-denominated interest rate is 3%.u = 1.2, d = 0.9, T = 0.75, n = 3, and K = $1.00.a. What is the price of a 9-month European put?b. What is the price of a 9-month American put?
On your post graduation celebratory trip you decide to travel to Munich, Germany, to Moscow, Russia. You leave Munich with 15,000 euros in your wallet. Wanting to exchange all of them for Russian rubles, you obtain the following quotes: Spot rate on the dollar/euro cross rate: $1.3214/E Spot rate on the ruble/dollar cross rate: Rbl30.96/$ What is the Russian ruble/euro cross rate? How many rubles will you obtain for your euros?
A Japanese exporter has a €1,000,000 receivable due in one year. To hedge the position, you will buy put options on euro True or False?