Fundamentals Of Corporate Finance, 9th Edition
9th Edition
ISBN: 9781260052220
Author: Richard Brealey; Stewart Myers; Alan Marcus
Publisher: McGraw-Hill Education
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Chapter 22, Problem 3QP
a.
Summary Introduction
To calculate: The
b.
Summary Introduction
To find: The rate of return in yen.
c.
Summary Introduction
To discuss: The rate of return of yen in the given scenario.
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Ay 3.
Suppose that in 2025, one- and two-year interest rates are 6.4% in the United States and 1.9% in Japan. The spot exchange rate is USD/JPY = 120.06. Suppose that one year later, interest rates are 3% in both countries, while the value of the yen has appreciated to USD/JPY = 114.80.
A) Benjamin Pinkerton from New York invested in a U.S. two-year zero-coupon bond at the start of the period and sold it after one year. What was his return?
B) Madame Butterfly from Nagasaki bought some dollars. She also invested in the two-year U.S. zero-coupon bond and sold it after one year. What was her return in yen?
C) Suppose that Ms. Butterfly had correctly forecasted the price at which she sold her bond and that she hedged her investment against currency risk. What would have been her return in yen?
Note: For all requirements, do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.
Use the information below to answer the following questions.
Currency per U.S. $
1.2380
1.2353
Australia dollar
6-months forward
Japan Yen
6-months forward
U.K. Pound
6-months forward
100.3600
100.0200
.6789
.6784
Suppose interest rate parity holds, and the current six month risk-free rate in the United
States is 5 percent. Use the approximate interest rate parity equation to answer the
following questions.
a. What must the six-month risk-free rate be in Australia? (Enter your answer as a
percent rounded to 2 decimal places, e.g., 32.16.)
b. What must the six-month risk-free rate be in Japan? (Enter your answer as a percent
rounded to 2 decimal places, e.g., 32.16.)
a. Australian risk-free rate
b. Japanese risk-free rate
c. Great Britain risk-free rate
c. What must the six-month risk-free rate be in Great Britain? (Enter your answer as a
percent rounded to 2 decimal places, e.g., 32.16.)
%
%
%
The following information is the same for Questions 19 - 20.
Currently, the spot exchange rate is USD/AUD = 0.85, and the one-year forward exchange rate is USD/AUD = 0.90.
One-year risk-free interest rate is 5.5 % in Australia and 3.2% in the United States. You are the U.S. investor evaluating
whether there is an opportunity for a covered interest rate arbitrage. You may borrow up to 1,000,000 USD or 1,176,470
AUD.
Compute the risk-free arbitrage profit.
85,058 USD
O45, 058 USD
38 USD
68,563 USD
Chapter 22 Solutions
Fundamentals Of Corporate Finance, 9th Edition
Ch. 22 - Prob. 1QPCh. 22 - Prob. 2QPCh. 22 - Prob. 3QPCh. 22 - Prob. 4QPCh. 22 - Prob. 5QPCh. 22 - Prob. 6QPCh. 22 - Prob. 7QPCh. 22 - Prob. 8QPCh. 22 - Prob. 9QPCh. 22 - Prob. 10QP
Ch. 22 - Prob. 11QPCh. 22 - Prob. 12QPCh. 22 - Prob. 13QPCh. 22 - Prob. 14QPCh. 22 - Prob. 15QPCh. 22 - Prob. 16QPCh. 22 - Prob. 17QPCh. 22 - Prob. 18QPCh. 22 - Prob. 19QPCh. 22 - Prob. 20QPCh. 22 - Prob. 21QPCh. 22 - Prob. 22QPCh. 22 - Prob. 24QPCh. 22 - Prob. 26QPCh. 22 - Prob. 27QPCh. 22 - Prob. 1MCCh. 22 - Prob. 2MCCh. 22 - Prob. 3MC
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