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
What are the predictions of balanced growth? When government can co-ordinate immediate investment in several industries one firm gives a market for another. It needs state pla

What are the assumptions of dependency theory? The assumptions of dependency theory: Dependency theory extends Marx is theory of surplus value to international relationship


Staff time is generally the principal cost component of an IS project. Define five other areas where project costs could increase. Project costs also occur by: • Contract la

How can less developed countries economies produced by developing its primary sector as agriculture? Less developed countries economies cannot grow by developing its primary se

What are the differences among developing economies? Developing countries are diverse. They can be different in terms of as: • Resource Endowment for example, a country is

Three factors which need to be assessed while considering risks are urgency, impact and likelihood. Define what is meant by every of these terms and demonstrate how each might be a

In long-term project planning, this is wise to suppose that staff will be accessible for project work for less than 100 per cent of the total accessible time. What factors will dec


QUESTION (a) Explain the Law of demand and the factors affecting demand for a product or service. (b) Explain and illustrate diagrammatically how the market demand for a pro