Foreign exchange market, Business Economics

Consider the following information in the international money markets:

            Spot rate                       :           $0.95:€

            Forward rate (one year)  :           $0.97:€

            Interest rate (DM)          :           7% per annum

            Interest rate ($)              :           9% per annum

a. Assume no transaction costs or taxes exist, do covered interest arbitrage profits exist in this situation? Describe flows.

b. Suppose now that transaction costs in the foreign exchange market equal to 0.25% per transaction. Do unexploited covered arbitrage profits still exist?

c. Suppose no transaction costs exist. Let the capital gain tax on currency profits equal to 25% and the ordinary income tax on interest income equal 50%. In this case, do covered arbitrage profits exist? How large are they? Describe the transactions required to exploit these profits.

Posted Date: 2/21/2013 2:04:19 AM | Location : United States







Related Discussions:- Foreign exchange market, Assignment Help, Ask Question on Foreign exchange market, Get Answer, Expert's Help, Foreign exchange market Discussions

Write discussion on Foreign exchange market
Your posts are moderated
Related Questions
Lottery Ticket Win! You win the lottery and are promised by the Lottery Commission $12,000 a year for 6 years, starting next year. Assume the interest rate is 9%. What is the pre

QUESTION 1 i) Use a simple human capital model to explain the rationale for undertaking higher education ii) Why do some people vary significantly in the amounts of human ca


Explain critics of the International Monetary Fund argue. Critics of the International Monetary Fund (IMF) argue: • The IMF is suffering through mission creep and requiremen

Explain about the term end stage assessment in project management methods. End stage assessment: At the end of every stage of a project, the project manager is needed to

Examine the factors that determine the price of computers in a free market. In recent years, the price of personal computers has continued to fall even in the face of increasing de

You are evaluating two (mutually exclusive) methods of strip-mining a resource-rich area. The alternatives are very similar, though one important difference is in the scale of the

Australia has emerged from the Global Finance Crisis (GFC) as "the strongest economy in the developed world" (Editorial, The Australian, 11 December 2009). The economic editor of T

What are the characteristics of the informal sector? The characteristics of the informal sector comprise: • working for yourself quite than an employer, • Small scale ent

Question: (a) Discuss the conditions necessary to achieve Pareto Efficiency. (b) Competitive markets are generally assumed to lead to a Pareto optimal allocation of resource