Suppose that the current spot exchange rate is €1.50/₤ and the one-year forward exchange rate is €1.60/₤. The one-year interest rate is 5.4% in euros and 5.2% in pounds. You can borrow at most €1,000,000 or the equivalent pound amount, i.e., ₤666,667, at the current spot exchange rate. Show how you can realize a guaranteed profit from covered interest arbitrage. Assume that you are a euro-based investor. Also determine the size of the arbitrage profit.

Q: (c) If the one-year interest rate on a dollar denominated Treasury bill is 4.5% p.a. and that on a…

A: The interest rate parity indicates that the forward premium or discount on currency exchange should…

Q: UCD (U.S. based MNC) will receive 250,000 euros in one year. The spot exchange rate today is $1.20…

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A: Spot exchange rate = $1.60/ euro 3 month forward rate = $1.55/ euro Spot exchange rate in 3 months =…

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A: Arbitrage profit is generated by purchasing and selling a same securities or portfolio at varying…

Q: Suppose the dollar interest rate and the pound sterling interest rate are the same, 6 percent per…

A: A rate through which individuals or companies convert their domestic currency with the other…

Q: Suppose the risk free rate in pounds (£) is 2.67% and the risk free rate in US dollars ($) is 5.03%.…

A: The forward exchange rate should be arbitrage-free because if the price is different from the…

Q: The current exchange rate is 1.1 dollars per euro. A 5-year U.S.government bond has a 3% yield, and…

A:

Q: Assume the following information regarding U.S. and European annualized interest rates: Currency…

A: Borrow euro € 20,000,000. Then conversion of € 20,000,000 to $ value is

Q: The $/£ spot exchange rate is currently $1.50 per pound and is expected to fall to $1.42 per pound…

A: Return on investment: Return on investment is a measure of an investment's profitability. It…

Q: If the exchange rate at time t is Et = €1/$. You invest $1 in an euro asset at t, which has an…

A: Exchange Rate at t =∈1/ $ Investment of $1

Q: A trader enters into a short forward contract on 100 million yen. The forward exchange rate is…

A: Gain or loss = Contract value * ( Forward rate - Spot rate )

Q: Suppose the U.S. yield curve is flat at 4% and the euro yield curve is flat at 3%. The current…

A: The rate that is determined by the contracting parties of a swap is known as swap rate. The swap…

Q: The Swiss Franc is trading at 1.1106 $/SFr, the euro is trading at 1.1268 $/euro. If you can buy or…

A: Arbitrary profit is the excess amount earned by using the mis-pricing in the market.

Q: Suppose that the exchange rates between euro, U.S. dollar and the yen are given in the table below.…

A: Three point arbitrage opportunity took place by using three different currencies, it includes buying…

Q: If the ZAR/USD exchange rate declines from 11.2500 to 11.2450, then the fall is equal to     5…

A: Pip means percentage in point or price interest point. It is the measurement of smallest change in…

Q: Suppose the US yield curve is flat at 5% and the euro yield curve is flat at 4%. The current…

A: Cost Accounting: It is the process of collecting, recording, analyzing the cost, summarizing cost,…

Q: d) You observe the following exchange rates in the market.       i) $1 = 0.85 euros and 1 krona = $…

A:

Q: he exchange rate, you are confident that the spot exchange rate will be USD 1.62 / EUR in 3 months.…

A: A forward contract is a tailored agreement to acquire or sell an item at a certain price at a future…

Q: what actions do you need to take to use these rates to earn a profit? what is the expected dollar…

A: Forward Exchange Contract is the type of foreign currency transaction. It is an agreement between…

Q: An exchange rate is 0.7000 and the six‐month domestic and foreign risk‐free interest rates are  5%…

A: The interest rate parity equation represents the relationship between the exchange rate of two…

Q: If the interest rate in Oman is 10% and in China is 15%. Current spot exchange rate is CNY16.59/OMR…

A: in covered interest arbitrage, you borrow in the currency which has lower interest rate and invest…

Q: What are the expected U.S. dollars UCD ends up receiving for its 250,000 euro receivable based on…

A:

Q: i sold a call option with an exercise price of $1.20/euro. the premium was $0.02/euro. what is my…

A: Buyer of Call option will exercise the option if Price is higher than the Exercise Price. For seller…

Q: Suppose the U.S. yield curve is flat at 5% and the euro yield curve is flat at 3%. The current…

A: We have, U.S. yield Curve = 5% Euro Yield Curve = 3% Exchange Rate = $1.25 per Euro Amount of Swap…

Q: Suppose that the interest rate on a US dollar deposit is 3% and the interest rate on a Japanese yen…

A: According to interest rate parity the interest rate and exchange rates must move according the…

Q: If the spot price of the euro is $1.10 per euro and the 30-day forward rate is $1.00 per euro, and…

A: Current Spot Price = $1.10 per Euro Forward Rate = $1.00 per euro  and the Spot price after 30 days…

Q: Suppose that the one-year interest rate is 4.0 percent in the United States; the spot exchange rate…

A: One year US interest rate = 4% Forward Rate = $1.16 Spot Rate = $1.25

Q: Suppose that gold costs USD 330 an ounce in the United States and GBP 220 an ounce in UK. What must…

A: Exchange rate between two countries must be reflected by purchase power parity.

Q: The current spot exchange rate is $1.22/€ and the three-month forward rate is $1.30/€. You enter…

A: Three month forward rate = $1.30/€ Spot exchange rate at maturity = $1.50/€

Q: the current spot exchange rate is $1.85/£ and the three-month forward rate is $1.80/£. Based on your…

A: Current spot rate =1.85 Three months forward rate =1.8

Q: Assume Switzerland has a one-year interest rate of 3% and that of Ghana is 16%. If the International…

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A: Triangular Arbitrage is a trading strategy in which profit is earned from the price differential of…

Q: Suppose the U.S. yield curve is flat at 5% and the euro yield curve is flat at 3%. The current…

A: Given, US yield Curve = 5% Euro Yield Curve = 3% Spot Rate = $1.25 per Euro Swap exchange = 2.6…

Q: c. Consider the spot exchange rate between the € and the pound sterling E€/£=1.50, while the annual…

A: Arbitrage is a way to earn gain by selling one security in a market and buying another security…

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A: Covered interest arbitrage is the method used by the investor that uses the different favourable…

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