Foreign exchange market and arbitrage process, Business Economics

Assignment Help:

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?


Related Discussions:- Foreign exchange market and arbitrage process

ECONOMICS, A. CALCUATE THE OPTIOMAL MONEY GROWTH RATE NEEDED FOR THE FED TO...

A. CALCUATE THE OPTIOMAL MONEY GROWTH RATE NEEDED FOR THE FED TO HIT ITS INFLATION TARGET RUN

What are less developed countries, What are Less Developed Countries (LDCs)...

What are Less Developed Countries (LDCs)? Less Developed Countries: Developing countries are frequently considered to as less developed countries. The World Bank categor

Illustration of development process affected on culture, Illustrate some ex...

Illustrate some example of the development process affected on culture. Examples of the development process affected on culture: • Foreign Direct investment (FDI) and IMF st

The fit stop, Summary Strategy management Variables Rewards

Summary Strategy management Variables Rewards

National income is initially at its equilibrium level, Assume  that nationa...

Assume  that national income is initially at its equilibrium level when desired investment falls. We would expect an enhance in national income by an amount equal to the decreasing

The effectiveness of the floating exchange rate model, QUESTION (a) Dif...

QUESTION (a) Differentiate between the fixed and floating exchange rate models. (b) Discuss the effectiveness of the floating exchange rate model. (c) Explain the mechani

Who will sell and buy permits, There are three industrial firms in a quaint...

There are three industrial firms in a quaint town of South Orange where the municipal government wants to reduce pollution to 120 units from uncontrolled level of 210 units. Three

Describe average in the class so far, On the first exam your score was a 96...

On the first exam your score was a 96%, on the second it was an 89%, and on the third test it was a 79%. The first exam is worth 10% of your grade, the second is worth 19% of your

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd