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Determine the total dollar amount of profit or loss

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Q1. Assume that interest rate parity exists. The spot rate of the Argentine peso is $.40. The one-year interest rate in the U.S. is 7%; the comparable rate is 12% in Argentina. Assume the futures price is equal to the forward rate. An investor purchased futures contracts on Argentine pesos, representing a total of 1,000,000 pesos.

Determine the total dollar amount of profit or loss from this futures contract based on the expectation that the Argentine peso will be worth $.42 in one year.

Q2. Jill Miden does not believe that the IFE holds. Current one-year interest rates in Europe are 5 percent, whereas one-year interest rates in the U.S. are 3 percent. Jill converts $100,000 to euros and invests them in Germany. One year later, she converts the euros back to dollars. The current spot rate of the euro is $1.10.

a. According to the IFE, what should the spot rate of the euro in one year be?

b. If the spot rate of the euro in one year is $1.00, what is Beth's percentage return from her strategy?

Reference no: EM133087827

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