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

Ask an Expert

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

Write your message here..

Related Questions

Monopoly pricing, 1. (classical monopoly pricing) A monopolist faces a dema... 1. (classical monopoly pricing) A monopolist faces a demand curve q (p) = 100   p: (a) If its cost function is C (q) = 2q; what is the optimal level of price and quantity? (b

Curse embodied, a)      What is the curse embodied in the standard producti... a)      What is the curse embodied in the standard production function? How does technological advance permit  an economy to avoid this curse? b )    In what significant way doe

Economics, Ask question #Minimum 1000words accepted# Ask question #Minimum 1000words accepted#

Compare and contrast the main theories of a demand for money, QUESTION 1 ... QUESTION 1 (a) Compare and contrast the main theories of a demand for money. (b) Specify a money demand function for a small island economy like Mauritius. QUESTION 2

Ikea market entry, How did ikea''s strategy prior to north American entry a... How did ikea''s strategy prior to north American entry and their strategy today?

Why do state approaches work into promoting development, Why do state appro... Why do state approaches work into promoting development? State planning and intervention is desirable due to the shortcomings of markets. The approaches range of state through

Development through resource transfer - low income countries, DEVELOPMENT T... DEVELOPMENT THROUGH RESOURCE TRANSFER is explained below The chief idea here was that (as mentioned previous) poor countries suffered from the savings and foreign exchange gaps

Essay on Localization of Industries, essay on Localization of Industries essay on Localization of Industries

What do you meant by the term outsourcing, Problem: (a) What do you me... Problem: (a) What do you meant by the term "Outsourcing"? (b) Outsourcing services will be categorized into two groups namely Technology Services and Business Processes.

Firm, What is a firm What is a firm