Reference no: EM131255740
Foreign Exchange (FOREX) Problem Set -
1. Calculate the exchange rate for dollars per SDR using exchange rates for the most recent day that you have exchange rate data. Show work.
Covered Interest Arbitrage Problems
1) Taking advantage of the "carry trade"
Example: Spot rate = 9.5 pesos/$
Forward Rate = 10 pesos/$
You have $1,000,000.
Interest Rates:
One year Govt debt Rate
Mexico 7%
USA 1%
Can you make money off of this?
What are the effects of covered interest arbitrage?
Calculation of % premium or discount. Premium or discount size should be equal to but opposite in sign to interest rate difference.
[(Fwd - Spot)/Spot] X 12/n X 100 = % premium or discount
Use this formula with direct rates (units of local currency per one unit of foreign). Indirect rates are units of foreign currency per one unit of local currency.
2) You have $1,000,000 to start with. Here are the facts:
Yen Spot Rate = 106Yen/$
Yen Fwd Rate = 103.5 Yen/$
(6months)
Interest Rates in Japan are 4% per annum (2% for 6 months).
Interest Rates in the USA are 8% per annum (4% for 6 months) for securities of similar risk and maturity.
What should you do?
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