Foreign exchange market and arbitrage process, Business Economics

Foreign Exchange Market and Arbitrage Process:

1. Suppose that the Brazilian Real is quoted at R 0.9955-1.0076/US$ and the Thai Baht is quoted at B25.2513-3986/US$. What is the direct quote for the real in Bangkok? Note that a direct quote is the home currency price of a foreign currency.

2. (a) Consider the following quotations of the spot and forward swap rates of the Swiss francs and pounds sterling published in the Financial Times on a specific date:

 

Spot

30-day

90-day

180-day

£

$2.0015-30

19-17

26-22

42-35

SFr

$0.6963-68

4-6

9-14

25-38

Required: Calculate the outright rates of the currencies showing the bid-ask spread in percentage for both the spot and forward rates.

(b) Consider the following exchange rates in the spot and forward exchange markets.

 

Spot

180-day

£

$2.0015-30

42-35

SFr

$0.6963-68

25-38

Required: Calculate the bid and ask SFr cross rates for both the spot and 180-day forward pounds sterling. Calculate the forward premium (or discount) on buying the pounds sterling.

Note: You can obtain either direct or indirect quotations of the Sfr for pounds sterling.

3. The covered interest parity condition states that the rates of return on dollar deposits and "covered" foreign deposits must be the same. Let F$/€ be the one year forward price of euros in terms of dollars, R$ be the dollar interest rate, Rbe the euro interest rate, and that the current euro-dollar exchange rate is denoted by E$/€.

Required:

(a)  Show the covered return on euro deposit and the condition of covered interest parity (CIP). How does the CIP condition change in the presence of transaction costs (ρ)?

(b)  If everyone in the world pays a tax of T percent on interest earnings and T percent on any capital gains due to exchange rate changes. How would such a tax alter the analysis of the interest parity condition?

(c)  Assume that the current euro-dollar exchange rate (E$/€) is $1.05 per euro and the one-year forward price of euro in terms of dollars (F$/€) is $1.113. Further suppose that the dollar interest rate (R$) is 10 percent and the euro interest rate (R) is 5 percent. Calculate the covered return on euro deposits and comment on whether the covered interest parity hold in this case?

(d)  The interest rate in the US is 10% per annum; in Japan, the comparable rate is 7%. The spot rate for the yen is $0.003800. If the covered interest parity holds, what is the 90-day forward rate in the presence of a 0.25% transaction costs?

Posted Date: 2/21/2013 2:02:22 AM | Location : United States







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

Write discussion on Foreign exchange market and arbitrage process
Your posts are moderated
Related Questions
advantages and disadvantages of commercial banking

price elasticity of demand for luxury goods in india

How can the savings gap be plugged? Low savings are a barrier type to growth. All developing countries have low incomes therefore low savings. A savings gap can be met through

What is Rostowís model? Rostowís Stages of Growth model argues to attain modernity all countries pass through similar stages of development as explained as follows: a. Sta

Does economic growth automatically reduce poverty? Growth implies more goods and services are obtainable to satisfy more wants and requirements. But the benefits of growth may

need assistance

what are the abstracting and indexing services in social science?

Distribution of benefits for transferring drivers to transit during a congested morning commute A residential suburb has N = 30,000 commuters who drive alone to jobs in a cen


Do you agree with what Dick Brandon said regarding sex? Do not take this question too seriously! Even though the quotation had a humorous intention, this does highlight a serio