Bundle: Fundamentals of Financial Management, Loose-leaf Version, 14th + LMS Integrated for MindTap Management, 2 terms (12 months) Printed Access Card
14th Edition
ISBN: 9781305777217
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Chapter 19, Problem 3P
Summary Introduction
To identify: The six month forward exchange rate.
Introduction:
Foreign Exchange Rate: Foreign exchange rate refers to the rate required to obtain a currency in other country’s currency.
Interest Rate Parity: Interest rate parity states that the variations in the interest rates of 2 countries is equilavent to the difference in the spot and future exchange rates between those two countries.
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Six-month T-bills have a nominal rate of 3%, while default-free Japanese bonds that mature in 6 months have a nominal rate of 1.50%. In the spot
exchange market, 1 yen equals $0.008. If interest rate parity holds, what is the 6-month forward exchange rate? Do not round intermediate calculations.
Round your answer to six decimal places.
A
The nominal yield on 6-month T-bills is 6%, while default-free Japanese bonds that mature in 6 months have a nominal rate of 3%. In the spot exchange market, 1 yen equals $0.011. If interest rate parity holds, what is the 6-month forward exchange rate? Do not round intermediate calculations. Round your answer to five decimal places.
The following current rates have been observed:
Spot exchange rate: $1.25/SFr
Expected future spot rate in 90 days: $1.2625/SFr
Annual interest rate on 90-day U.S.-dollar-denominated bonds: 12%
Annual interest rate on 90-day SFr-denominated bonds: 4%
(i) At these initial rates, does uncovered interest parity hold? Why?
(ii) What spot exchange rate will be consistent with uncovered interest parity?
Chapter 19 Solutions
Bundle: Fundamentals of Financial Management, Loose-leaf Version, 14th + LMS Integrated for MindTap Management, 2 terms (12 months) Printed Access Card
Ch. 19 - Why do U.S. corporations build manufacturing...Ch. 19 - Prob. 2QCh. 19 - Prob. 3QCh. 19 - Should firms require higher rates of return on...Ch. 19 - Does interest rate parity imply that interest...Ch. 19 - Prob. 6QCh. 19 - Prob. 7QCh. 19 - Prob. 1PCh. 19 - Prob. 2PCh. 19 - Prob. 3P
Ch. 19 - Prob. 4PCh. 19 - Prob. 5PCh. 19 - Prob. 6PCh. 19 - CURRENCY APPRECIATION Suppose that 1 Danish krone...Ch. 19 - Prob. 8PCh. 19 - Prob. 9PCh. 19 - Prob. 10PCh. 19 - Prob. 11PCh. 19 - INTEREST RATE PARITY Assume that interest rate...Ch. 19 - Prob. 13PCh. 19 - EXCHANGE GAINS AND LOSSES You are the vice...Ch. 19 - Prob. 15PCh. 19 - Prob. 16PCh. 19 - FOREIGN CAPITAL BUDGETING Solitaire Machinery is a...Ch. 19 - Prob. 19IC
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- Six-month T-bills have a nominal rate of 2%, while default-freeJapanese bonds that mature in 6 months have a nominal rate of 1.25%. In the spot exchangemarket, 1 yen equals $0.0091. If interest rate parity holds, what is the 6-month forwardexchange rate?arrow_forwardAn exchange rate is 0.7000 and the six‐month domestic and foreign risk‐free interest rates are 5% and 7% (both expressed with continuous compounding). What is the six‐month forward rate? a) 0.7070 b) 0.7177 c) 0.7249 d) 0.6930arrow_forwardCurrently, the spot exchange rate is $1.67 per £ and the three-month forward exchange rate is $1.69 per £. The three-month interest rate is 8.0% per annum in the U.S. and 5.8% per annum in the U.K. Assume that you can borrow as much as $1,670,000 or £1,000,000. Required: a. Determine whether the interest rate parity is currently holding. b. If the IRP is not holding, how would you carry out covered interest arbitrage? What will be your arbitrage profit? c. Explain how the IRP will be restored as a result of covered arbitrage activities. Complete this question by entering your answers in the tabs below. Required A Required B Required C Determine whether the interest rate parity is currently holding. Determine whether the interest rate parity is currently holding.arrow_forward
- Currently, the spot exchange rate is $1.51 per £ and the three-month forward exchange rate is $1.53 per £. The three-month interest rate is 8.0% per annum in the U.S. and 5.8% per annum in the U.K. Assume that you can borrow as much as $1,510,000 or £1,000,000. Required: a. Determine whether the interest rate parity is currently holding. b. If the IRP is not holding, how would you carry out covered interest arbitrage? What will be your arbitrage profit? c. Explain how the IRP will be restored as a result of covered arbitrage activities. Complete this question by entering your answers in the tabs below. Required A Required B Required C If the IRP is not holding, how would you carry out covered interest arbitrage? What will be your arbitrage profit? Note: Do not round intermediate calculations. Interest arbitrage Arbitrage profit Borrow in the U.S. and invest in the U.K. Hedge exchange rate risk by selling British pounds forward. < Required A Required Carrow_forwardIf spot rate is USD2.5968/OMR and interest rate for USD is 2% per annum. One-year forward exchange rate is USD 2.6008/OMR. If interest rate parity holds and USD is the Home currency, then calculate the interest for OMR? 1.8431% 0.021571% 2.1571% 0.018431%arrow_forwardCurrently, the spot exchange rate is $1.56 per £ and the three-month forward exchange rate is $1.58 per £. The three-month interest rate is 8.0% per annum in the U.S. and 5.8% per annum in the U.K. Assume that you can borrow as much as $1,560,000 or £1,000,000. Required: Determine whether the interest rate parity is currently holding. If the IRP is not holding, how would you carry out covered interest arbitrage? What will be your arbitrage profit? Explain how the IRP will be restored as a result of covered arbitrage activities.arrow_forward
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