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1) Assume that interest rate parity holds so that future or forward exchange rates adjust to eliminate investor arbitrage profits. If interest rates in Britain are higher than corresponding interest rates in Japan, would you expect an appreciating pound or a depreciating pound in the futures (forward) market relative to the current spot market rate? In terms of the supply and demand for pounds in the spot and forward currency markets, what is implicitly occurring in each as a result of interest rate parity? Is the pound selling forward at a premium or at a discount relative to the yen?
2) The spot market rate for the euro is 1.4059 Canadian dollars per euro. The 3-month futures (forward) rate on the euro is 1.4147 Canadian dollars per euro. The yield on a 3-month Canadian government security is 1.16 percent (0.0116 decimal), annual percentage rate (APR). The yield on a 3-month euro area security is 0.24 percent (0.0024 decimal), annual percentage rate (APR). Show that interest rate parity (IRP) does not hold by solving for the forward rate that ensures IRP. How would you take advantage of the arbitrage opportunity arising from the actual data (i.e., borrow 1,000,000 euros, convert to Canadian dollars, invest in Canada, sell the proceeds forward and then repay your loan or borrow 1,000,000 Canadian dollars, convert to euros, invest in europe, sell the proceeds forward and then repay your loan)?
Chicago Corporation purchases 1,000 shares of the preferred stock of Denver Corp. for $40 per share. In addition, Chicago pays another 1,000 in commissions.
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Determine the implied growth duration of Kayleigh Industries given following:
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Explain how the Wal-Mart outlets in China would use the spot market in foreign exchange. Explain how Wal-Mart might utilize the international money markets when it is establishing other Wal-Mart stores in Asia. Expalin how Wal-Mart could use the inte..
Suppose you have been hired to run a pension fund for TelDet Corporation, a small manufacturing firm. The firm currently has $5 million in the fund and expects to have cash inflows of $2 million a year for 1st 5-years followed by cash outflows of $3 ..
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Describe the type of interest rate risk each institution faces. Propose swap which would result in each institution having the same type of asset and liability cash flows.
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