MICROECONOMICS LL W/ CONNECT
20th Edition
ISBN: 9781307149036
Author: McConnell
Publisher: MCG
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Question
Chapter 25, Problem 11DQ
To determine
The risk associated with due payment.
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Suppose that the current exchange rate is 1.48 euro = 1 pound, but it is expected to be 1.35 euro =1 pound in one year. If the current interest rate on a one-year government bond in the United Kingdom is 9 %, what does the interest-rate parity condition indicate the interest rate will be on a one-year government bond in Germany? Assume that there are no differences in risk, liquidity, taxation, or information costs between the bonds.
The German interest rate will be ________ %. (Round your response to two decimal places.)
2. Suppose a currency is temporarily undervalued by a fixed exchange rate system, such as the international gold standard. Let that currency be the US dollar, and expressed in terms of British pounds. a. Show this disequilibrium using a supply and demand graph. Be sure to carefully label your axes. b. Clearly explain how one could profit by arbitraging in dollars using a bill of exchange. If it helps, you can use a numerical example.
Let’s suppose you (USA dealer) imported one Earth Equipment machine from German dealer on March 1, 2017 at € 300,000 each, payable in 30 days. The exchange rate on March 1, 2017 was 1.16 US$/€. Then you sold the machine in the US market at US$350,000 in cash on March 29, 2017. On April 1, 2017, you paid to Italian car dealer at the exchange rate of 1.19 US$/€. What was profit or loss from this business in terms of US$? (Please assume all costs are included in price.)
Group of answer choices
-7000
-9200
-4500
-10200
Chapter 25 Solutions
MICROECONOMICS LL W/ CONNECT
Ch. 25.1 - Prob. 1QQCh. 25.1 - Prob. 2QQCh. 25.1 - Prob. 3QQCh. 25.1 - Prob. 4QQCh. 25 - Prob. 1DQCh. 25 - Prob. 2DQCh. 25 - Prob. 3DQCh. 25 - Prob. 4DQCh. 25 - Prob. 5DQCh. 25 - Prob. 6DQ
Ch. 25 - Prob. 7DQCh. 25 - Prob. 8DQCh. 25 - Prob. 9DQCh. 25 - Prob. 10DQCh. 25 - Prob. 11DQCh. 25 - Prob. 1RQCh. 25 - Prob. 2RQCh. 25 - Prob. 3RQCh. 25 - Prob. 4RQCh. 25 - Prob. 5RQCh. 25 - Prob. 6RQCh. 25 - Prob. 7RQCh. 25 - Prob. 8RQCh. 25 - Prob. 9RQCh. 25 - Prob. 10RQCh. 25 - Prob. 1PCh. 25 - Prob. 2PCh. 25 - Prob. 3PCh. 25 - Prob. 4PCh. 25 - Prob. 5P
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- Suppose the 12-month forward price of the yen in terms of dollars is .02 dollars per yen. Suppose the spot price of of the yen in terms of dollars is .019. Next, suppose that currently the annual interest rate on dollar deposits is 2%, while the interest rate on a comparable yen deposit is 1%. There are no transactions costs. Is there an arbitrage opportunity here? If so, explain exactly how you would take advantage of this situation to make riskless profits.arrow_forwardSuppose that the current EUR/GBP exchange rate is £0.86 per euro. The current 6-month interest rates are: GBP 4%, EUR 6%. There are three 6-month forward contracts available, with the following exchange rates: Contract A B C EUR/GBP 0.86 0.85 0.90 Given the current EUR/GBP exchange rate and the available forward contracts, can you identify any arbitrage opportunities? If yes, provide two examples. In each case, calculate arbitrage profit and explain how this profit can be earned.arrow_forward12. suppose that the 2-year interest rates in the US(foreign) and KRW (domestic) are 1.5% and 3%, respectively. The current spot exchange rate is 1150 KRW per USD. The 2-year foward exchange rate should be F0 = 1150e^2(3%-1.5%) = 1185 Explain what strategy can be considered to have riskless profit if F0 is less or greater that 1185 Case 1 : F0 = 1200 Case 2 : F0 = 1130arrow_forward
- Each of the governments of Brazil and Turkey has issued bonds in Brazilian real (BRL) and Turkish lira (TRY), respectively. Assume that both government securities are one-year bonds, i.e., paying the face value of the bond one year from now. Suppose that the exchange rate, E, stands at 1 Brazilian real per 0.79 Turkish lira. The following table gives face values and prices of both bonds: Face Value Price Brazil BRL 10,000 BRL 9,630 Turkey TRY 10,000 TRY 9,450 Compute the nominal interest rate on each of the bonds. Compute the expected exchange rate next year consistent with uncovered interest parity. If you expect the real to depreciate relative to the lira, which bond should you buy? Assume that you are a Brazilian investor. You exchange the reals for liras and purchase the Turkish bond. One year from now, it turns out that the exchange rate, E, is 0.75, i.e., 0.75 liras buy one real. What is your realized rate of return in reals compared to the realized rate of return…arrow_forwardSuppose that the government of China is currently fixing the exchange rate between the U.S. dollar and the Chinese yuan at a rate of $1 = 6 yuan. Also suppose that at this exchange rate, the people who want to convert dollars to yuan are asking to convert $10 billion per day of dollars into yuan, while the people who are wanting to convert yuan into dollars are asking to convert 36 billion yuan into dollars. What will happen to the size of China’s official reserves of dollars? a. Increase. b. Decrease. c. Stay the same.arrow_forwardAssume that the U.S. interest rate is 12 percent, while the British interest rate is 15 percent. If interest rate parity exists, then: O a.U.S. investors will earn 12 percent whether they use covered interest arbitrage or invest in the United States. O b. U.S. investors will earn a higher rate of return when using covered interest arbitrage than what they would earn in the United States. O c. British investors who invest in the United Kingdom will achieve the same return as U.S. investors who invest in the United States. O d. U.S. investors will earn 15 percent whether they use covered interest arbitrage or invest in the United States.arrow_forward
- Suppose the cost of purchasing euros (EUR) and Canadian dollars (CAD) at the airport are given by the following bid / ask price: EUR 1 = USD 1.32 / 1.47 CAD 1 = USD 0.85 / 0.97 How much USD is required to purchase EUR 2,000? How much USD is required to purchase CAD 1,500? How much USD will you get if you’d like to sell EUR 500 to the airport’s currency exchange store? How much USD will you get if you’d like to sell CAD 500 to the airport’s currency exchange store? Calculate the percent spread or margin for USDEUR. Calculate the percent spread or margin for USDCAD.arrow_forwardSuppose that the current spot exchange rate is 60.830/s and the three-month forward exchange rate is €0.815/S. The three-month interest rate is 6.00 percent per annum in the United States and 5.40 percent per annum in France. Assume that you can borrow up to $1,000,000 or 6830,000. Show how to realize a certain profit via covered interest arbitrage, assuming that you want to realize profit in terms of U.S. dollars. Also determine the size of your arbitrage profitarrow_forwardSuppose that currency market for Mexican pesos and Canadian dollars is initially in equilibrium, with 10 pesos trading for 1 Canadian dollar. Because of a new trade agreement, there has been a shift in the demand for pesos due to a sudden increase in the capital inflow from Canada to Mexico. What is the effect of the capital inflow on the exchange rate of pesos for Canadian dollars? Explain and show grahically. On your graph, Quantity of Canadian dollars should be on the vertical axis and the Exchange rate (Mexican pesos per Canadian dollar should be on the vertical axis.arrow_forward
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