Integrative problem-exchange rate behavior
Course:- Financial Management
Reference No.:- EM131310012

Assignment Help
Expertsmind Rated 4.9 / 5 based on 47215 reviews.
Review Site
Assignment Help >> Financial Management

Part 2—Integrative Problem

Exchange Rate Behavior

As an employee of the foreign exchange department for a large company, you have been given the following information.

1. 2.

Beginning of Year Spot rate of £ = $1.596

Spot rate of Australian dollar (A$) = $.70

Cross exchange rate: £1 = A$2.28

One-year forward rate of A$ = $.71

One-year forward rate of £ = $1.58004

One-year U.S. interest rate = 8.00%

One-year British interest rate = 9.09%

One-year Australian interest rate = 7.00%

Determine whether triangular arbitrage is feasible, and if so, how it should be conducted to make a profit.

Using the information in question 1, determine whether covered interest arbitrage is feasible between Pound and US$, and between A$ and US$. Furthermore if so, how you should be conducted to make a profit and how much would you make with one million US dollars?

Based on the information in question 1 for the beginning of the year, use the international Fisher effect (IFE) theory to forecast the annual percentage change in the British pound’s value over the year.

Assume that at the beginning of the year, the pound’s value is in equilibrium. Assume that over the year the British inflation rate is 6 percent while the U.S. inflation rate is 4 percent. Assume that any change in the pound’s value due to the inflation differential has occurred by the end of the year. Using this information and the information provided in question 1, determine how the pound’s value changed over the year.

Assume that the pound’s depreciation over the year was attributed to central bank intervention. Explain the type of direct, indirect, sterilized intervention that would place downward pressure on the value of the pound.

Put your comment

Ask Question & Get Answers from Experts
Browse some more (Financial Management) Materials
You believe that ABC company will pay dividend of $2 on its common stock next year. Thereafter, you expect dividends to grow at a rate of 6% per year into the future. If you r
George and Bill are stuck together on a desert island. There are two goods, Coconut (C) and Bananas (B). George has production function 5C+B=40, while Bill has production func
Suppose a European call option to buy a share for $100.00 costs $5.00. The stock currently trades for $97.00. If the option is held to maturity under what conditions does the
Find the required return for an asset with a beta of 0.90  when the? risk-free rate and market return are 8% and 12% respectivley. Find the ?risk-free rate for a firm with a r
You have medical insurance for your family with a $250 deductible, 20% coinsurance, and $1,500 OOP maximum for each individual and $3,000 family OOP maximum. Calculate your OO
When preparing capital budgeting analysis for a new project, Chris Johnson, a chief financial officer at BT Industries, faced a dilemma. The project involved a production of n
You own a bond with the following features: 9 years to maturity, face value of $1000, coupon rate of 3% (annual coupons) and yield to maturity of 9.8%. If you expect the yield
Starting when you are 20 years old, you deposit $100 a year into an paying 5.50% interest compounded semi-annually. How much will you have in the account when you retire at th