UPENN: LOOSE LEAF CORP.FIN W/CONNECT
17th Edition
ISBN: 9781260361278
Author: Ross
Publisher: McGraw-Hill Publishing Co.
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Chapter 31, Problem 6QP
Summary Introduction
To calculate: Six months risk-free rate in Country GB, Country J and Country S.
Interest Rate Parity:
There is a kind of relationship between the spot and forward exchange rate and relative interest rates if the interest rate arbitrage opportunity does not exist. This relation is called the interest rate parity.
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Students have asked these similar questions
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.)
%
%
%
Assume the spot rate on the Singapore Dollar is .6920 and the 6-month forward rate is .6929. Also assume interest rate parity holds and the current annual risk-free rate in the United States is 3.3 percent. What must the six-month risk-free rate be in Singapore?
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?
Chapter 31 Solutions
UPENN: LOOSE LEAF CORP.FIN W/CONNECT
Ch. 31 - Spot and Forward Rates Suppose the exchange rate...Ch. 31 - Prob. 2CQCh. 31 - Prob. 3CQCh. 31 - Prob. 4CQCh. 31 - International Risks At one point, Duracell...Ch. 31 - Multinational Corporations Given that many...Ch. 31 - Prob. 7CQCh. 31 - Exchange Rate Movements Some countries encourage...Ch. 31 - Prob. 9CQCh. 31 - Exchange Rate Risk If you are an exporter who must...
Ch. 31 - International Capital Budgeting Suppose it is your...Ch. 31 - International Capital Budgeting An investment in a...Ch. 31 - International Borrowing If a U.S. firm raises...Ch. 31 - International Investment If financial markets arc...Ch. 31 - Using Exchange Rates Take a look back at Figure 3...Ch. 31 - Prob. 2QPCh. 31 - Prob. 3QPCh. 31 - Using Spot and Forward Exchange Rates Suppose the...Ch. 31 - Prob. 5QPCh. 31 - Prob. 6QPCh. 31 - Interest Rates and Arbitrage The treasurer of a...Ch. 31 - Inflation and Exchange Rates Suppose the current...Ch. 31 - Exchange Rate Risk Suppose your company imports...Ch. 31 - Prob. 10QPCh. 31 - The International Fisher Effect You observe that...Ch. 31 - Prob. 12QPCh. 31 - Prob. 13QPCh. 31 - Capital Budgeting Lakonishok Equipment has an...Ch. 31 - Capital Budgeting You are evaluating a proposed...Ch. 31 - Prob. 16QPCh. 31 - Prob. 17QPCh. 31 - Using the Exact International Fisher Effect From...Ch. 31 - Prob. 1MCCh. 31 - What will happen to the companys profits if the...Ch. 31 - Ignoring taxes, what are East Coast Yachts...Ch. 31 - How can the company hedge its exchange rate risk?...Ch. 31 - Taking all factors into account, should the...
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