Pearson eText Foundations of Finance -- Instant Access (Pearson+)
10th Edition
ISBN: 9780135639382
Author: Arthur Keown, John Martin
Publisher: PEARSON+
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Question
Chapter 16, Problem 11SP
Summary Introduction
To determine: Spot exchange rate of ($/€).
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Suppose current one-year interest rate in Europe is 5%, whereas one-year interest rate in the U.S. is 3%. Assume the current spot price of euro (EUR) is $1.10. Answer questions a) and b) below.
If the exchange rate movement is consistent with the international Fisher effect (IFE), what will the spot price of EUR in one year be?
Consider a trader who does not believe the IFE holds. The trader has decided to borrow $110,000 to invest in EUR-denominated deposits for one year without hedging. Recall the current EUR spot rate is $1.10. If the EUR spot rate in one year turns out to be $1.09, what will be the percentage return on this trading strategy?
Suppose the current USD/EUR spot exchange rate is 1.20$/ €. At the same the euro interest
rate amount to 10% per year while the dollar interest rate is 0% per year.
a. What is the no-arbitrage one-year USD/EUR forward exchange?
b. Suppose the one-year USD/EUR forward exchange was 1.25$/ €. How could you make
money from this situation?
4
α) Suppose that the annual interest rate of the Euro (€) is 2% and the annual interest rate of the US Dollar ($) is 1%. The current $/€ exchange rate is $1 = €1.10. The expected exchange rate from a European investor after one year is 1.10 5 (1$= 1.105€). Is there arbitrage margins from the point of view of a European investor provided that his expectation for the future exchange rate is verified? Show what this investor can do.
Chapter 16 Solutions
Pearson eText Foundations of Finance -- Instant Access (Pearson+)
Ch. 16 - Prob. 1RQCh. 16 - Prob. 2RQCh. 16 - What is meant by arbitrage profits?Ch. 16 - Prob. 4RQCh. 16 - Prob. 5RQCh. 16 - Prob. 6RQCh. 16 - Prob. 7RQCh. 16 - Prob. 8RQCh. 16 - Prob. 9RQCh. 16 - Prob. 1SP
Ch. 16 - Prob. 2SPCh. 16 - Prob. 3SPCh. 16 - Prob. 4SPCh. 16 - (Exchange rate arbitrage) You own 10,000. The...Ch. 16 - Prob. 6SPCh. 16 - Prob. 7SPCh. 16 - Prob. 8SPCh. 16 - Prob. 9SPCh. 16 - Prob. 10SPCh. 16 - Prob. 11SPCh. 16 - (Purchasing-power parity) Lets assume a McDonalds...Ch. 16 - Prob. 1MCCh. 16 - Prob. 2MCCh. 16 - Prob. 3MCCh. 16 - d. What are the differences among a forward...Ch. 16 - Prob. 5MCCh. 16 - Prob. 6MCCh. 16 - Selling Quotes for Foreign Currencies in New York...Ch. 16 - Prob. 8MCCh. 16 - Prob. 9MC
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