Chapter 18, Problem 4QA

Interest Rate Parity Consider investors who invest in either U.S. or British one-year Treasury bills. Assume zero transaction costs and no taxes. If interest rate parity exists, then the return for U.S. investors who use covered interest arbitrage will be the same as the return for U.S. investors who invest in U.S. Treasury bills. Is this statement true or false? If false, correct the statement.

Question In each of the following cases indicate whether it would be appropriate for an FI to buy or sell a forward contract to hedge the appropriate risk.a) A commercial bank plans to issue bonds in three months. b) An insurance company plans to sell bonds in two months. c) A thrift is going to purchase Treasury securities next month. d) A U.S. bank lends to a French company; the loan is payable in euros. e) A mutual fund plans to sell its holding of stock in a German company.

. Which of the following is incorrect? Country credit risk spread is the difference between yields of international bonds of the country and government bonds of the developed country (generally US. Credit default swap (CDS) is a derivative product which provides the buyer to grantee to be paid back face value of a bond by credit default swap issuer in case the borrower does not pay. In general, a Eurobond of developing country or company interest rate is smaller than sum of same maturity of US bond rate and country of company credit default swap rate point (CDS premium /10000). In general, a company or county Eurobond's primary market sale is done by a syndicated group (banks and other financial intuitions). If the US dollar index (USDX) increases, we expect depreciation of any other currency against the USD.