You are given these quotes by the bank: You can sell Canadian dollars (C$) to the bank for $0.70. You can buy Canadian dollars from the bank for $0.73. The bank is willing to buy dollars for 0.9 euro per dollar. The bank is willing to sell dollars for 0.94 euro per dollar. The bank is willing to buy Canadian dollars for 0.64 euro per C$0. The bank is willing to sell Canadian dollars for 0.68 euro per C$0. You have $100,000. Estimate your profit or loss if you attempt to engage in triangular arbitrage by converting your dollars to euros, then converting your euros to Canadian dollars, and then converting your Canadian dollars to U.S. dollars.
> Brazil commonly has a much higher nominal interest rate than the United States. Yet, some large institutional investors do not invest in Brazilian money market securities, even when they believe the securities have no credit (default) risk. Use the IFE t
> Russia commonly experiences a high rate of inflation. a. Explain why the high Russian inflation typically places severe downward pressure on the value of the Russian ruble. b. In some periods, the Russian government intervenes in the foreign exchange m
> As of today, assume the following information is available: a. Use the forward rate to forecast the percentage change in the Mexican peso over the next year. b. Use the differential in expected inflation to forecast the percentage change in the Mexican
> Explain the rationale underlying PPP theory.
> Assume that the spot exchange rate of the Singapore dollar is $0.70. The one-year interest rate is 11 percent in the United States and 7 percent in Singapore. What will the spot rate be in one year according to the IFE? Which force causes the spot rate t
> Assume that the spot exchange rate of the British pound is $1.73. How will this spot rate adjust according to PPP if the United Kingdom experiences an inflation rate of 7 percent while the United States experiences an inflation rate of 2 percent?
> How is it possible for PPP to hold if the IFE does not?
> Assume that the inflation rate in Brazil is expected to increase substantially. How will this affect Brazil’s nominal interest rates and the value of its currency (the real)? If the IFE holds, how will the nominal return to U.S. investors who invest in B
> IFE Shouldn’t the IFE discourage investors from attempting to capitalize on higher foreign interest rates? Why do some investors continue to invest overseas, even when they have no other transactions overseas?
> Jim Logan’s business, the Sports Exports Company, continues to grow. His primary product is the footballs he produces and exports to a distributor in the United Kingdom. However, his recent joint venture with a British firm has also been successful. Unde
> Assume that the nominal interest rate in Mexico is 48 percent and the interest rate in the United States is 8 percent for one-year securities that are free from default risk. What does the IFE suggest about the differential in expected inflation in these
> Japan has typically had lower inflation than the United States has. How would one expect this to affect the Japanese yen’s value? Why does this expected relationship not always occur?
> The currencies of some Latin American countries, such as Brazil and Venezuela, frequently weaken against most other currencies. What concept in this chapter explains this occurrence? Why don’t all U.S.-based MNCs use forward contracts to hedge their futu
> Assume that several European countries that use the euro as their currency experience higher inflation than the United States does, while two other European countries that use the euro as their currency experience lower inflation than the United States d
> investors in the United States and Canada require the same real interest rate, and the nominal rate of interest is 2 percent higher in Canada, what does this imply about expectations of U.S. inflation and Canadian inflation? What do these inflationary ex
> Explain the theory of purchasing power parity (PPP). Based on this theory, what is a general forecast of the values of currencies in countries with high inflation?
> Explain the concept of interest rate parity. Provide the rationale for its possible existence
> The terrorist attacks on the United States on September 11, 2001, led to expectations of a weaker U.S. economy. Explain how such expectations could have affected U.S. interest rates and, therefore, the forward rate premium (or discount) on various foreig
> Assume the following information Given this information, is covered interest arbitrage worthwhile for Mexican investors who have pesos to invest? Explain your answer.
> Assume the following information: Given this information, what would be the yield (percentage return) to a U.S. investor who used covered interest arbitrage? (Assume the investor invests $1 million.) What market forces would occur to eliminate any furth
> For the last year, Blades, Inc., has been exporting its products to Thailand to supplement its declining U.S. sales. Under the existing arrangement, Blades sells 180,000 pairs of roller blades annually to Entertainment Products, a Thai retailer, for a fi
> Assume that the one-year interest rate in Canada is 4 percent. The one-year U.S. interest rate is 8 percent. The spot rate of the Canadian dollar (C$) is $0.94. The forward rate of the Canadian dollar is $0.98. a. Is covered interest arbitrage feasible f
> Assume that interest rate parity holds and will continue to hold in the future. At the beginning of the month, the spot rate of the British pound is $1.60, while the one-year forward rate is $1.50. Assume that U.S. annual interest rate remains steady ove
> Today, the annualized interest rate in the United States is 4 percent for any debt maturity. The annualized interest rate in Australia is 4 percent for debt maturities of three months or less, 5 percent for debt maturities between three months and six mo
> Assume that the one-year interest rate in the United Kingdom is 9 percent, whereas the one-year interest in the United States is 4 percent. The spot rate of the pound is $1.50. Assume that interest rate parity exists. The quoted one-year interest in the
> As of now, the nominal interest rate is 6 percent in the United States and 6 percent in Australia. The spot rate of the Australian dollar is $0.58, whereas the oneyear forward rate of the Australian dollar exhibits a discount of 2 percent. Assume that as
> Interest rate parity exists between the United States and Poland (its currency is the zloty). The one-year risk-free CD (deposit) rate in the United States is 7 percent. The one-year risk-free CD rate in Poland is 5 percent; it is denominated in zloty. A
> You obtain the following quotes from different banks. One bank is willing to buy or sell Japanese yen at an exchange rate of 110 yen per dollar. A second bank is willing to buy or sell the Argentine peso at an exchange rate of $0.37 per peso. A third ban
> Assume that interest rate parity exists and will continue to exist. As of this morning, the one-month interest rate in the United States was higher than the one-month interest rate in the eurozone. Assume that as a result of the European Central Bank’s m
> Explain the concept of covered interest arbitrage and the scenario necessary for it to be plausible.
> Biscayne Co. will be receiving Mexican pesos today and will need to convert them into Australian dollars. Today, a U.S. dollar can be exchanged for 10 Mexican pesos. An Australian dollar is worth one-half of a U.S. dollar. a. What is the spot rate of a M
> Jim Logan, owner of the Sports Exports Company, remains concerned about his exposure to exchange rate risk. Even if he hedges his transactions from one month to another, he recognizes that a long-term trend of depreciation in the British pound could have
> Alabama Bank is willing to buy or sell British pounds for $1.98. The bank is willing to buy or sell Mexican pesos at an exchange rate of 10 pesos per dollar. It is willing to purchase British pounds at an exchange rate of 1 peso 0 5 .05 British pound. Sh
> A bank is willing to buy dollars for 0.9 euro per dollar. It is willing to sell dollars for 0.91 euro per dollar. Also consider the following information: You can sell Australian dollars (A$) to the bank for $0.72. You can buy Australian dollars from the
> Assume that the annual U.S. interest rate is currently 8 percent, whereas Japan’s annual interest rate is currently 7 percent. The spot rate of the Japanese yen is $0.01. The one-year forward rate of the Japanese yen is $0.01. Assume that as covered inte
> Assume that interest rate parity exists, along with the following information: Spot rate of Swiss franc 5 $0.80 6-month forward rate of Swiss franc $ 5 0.78 12-month forward rate of Swiss franc $ 5 0.81 Assume that the annualized U.S. interest rate is 7
> Earlier this morning, the annual U.S. interest rate was 6 percent, whereas Mexico’s annual interest rate was 8 percent. The spot rate of the Mexican peso was $0.16. The one-year forward rate of the peso was $0.15. Assume that as covered interest arbitrag
> Assume zero transaction costs. As of now, the Japanese oneyear interest rate is 3 percent, and the U.S. one-year interest rate is 9 percent. The spot rate of the Japanese yen is $0.0090 and the one-year forward rate of the Japanese yen is $0.0097. a. Det
> Today, the one-year U.S. interest rate is 4 percent, while the corresponding rate in Argentina is 17 percent. The spot rate of the Argentine peso (AP) is $0.44. The one-year forward rate of the AP exhibits a 14 percent discount. Determine the yield (perc
> Assume that interest rate parity exists. The spot rate of the Argentine peso is $0.40. The one-year interest rate in the United States is 7 percent; the comparable rate is 12 percent in Argentina. Assume the futures price is equal to the forward rate. An
> Assume that interest rate parity exists. The 6-month forward rate of the Swiss franc has a premium, whereas the 12-month forward rate of the Swiss franc has a discount. What does this tell you about the relative level of Swiss interest rates versus U.S.
> Assume the following information: Given this information, is triangular arbitrage possible? If so, explain the steps that would reflect triangular arbitrage, and compute the profit from this strategy if you had $1 million to use. What market forces woul
> Blades, Inc., has been exporting to Thailand since it made the decision to supplement its declining U.S. sales by exporting its roller blades to that country. Furthermore, Blades has recently begun exporting its products to a retailer in the United Kingd
> Assume that interest rate parity exists, along with the following information: Spot rate of British pound 5 $1.80 6-month forward rate of pound 5 $1.82 12-month forward rate of pound 5 $1.78 a. Is the annualized 6-month U.S. risk-free interest rate grea
> Assume that interest rate parity exists and will continue to exist. As of today, the one-year interest rate in Singapore is 4 percent; the corresponding rate is 7 percent in the United States. The Singapore central bank is expected to decrease interest r
> Assume that the spot rate of the Brazilian real is $0.30 today. Also assume that interest rate parity exists. Obtain the interest rate data you need from Bloomberg.com to derive the one-year forward rate premium (or discount), and then determine the one-
> Assume that interest rate parity exists. As of this morning, the one-month interest rate in Canada was lower than the one-month interest rate in the United States. Assume that as a result of the Fed’s monetary policy this afternoon, the one-month interes
> Assume that the annual U.S. interest rate is currently 6 percent, whereas Germany’s annual interest rate is currently 8 percent. The spot rate of the euro is $1.10 and the one-year forward rate of the euro is $1.10. Assume that as covered interest arbitr
> Assume that cross exchange rates are always properly aligned, such that triangular arbitrage is not feasible. While at the Miami airport today, you notice that a U.S. dollar can be exchanged for 125 Japanese yen or 4 Argentine pesos at the foreign exchan
> You go to a bank and are given these quotes: You can buy a euro for 14 pesos. The bank will pay you 13 pesos for a euro. You can buy a U.S. dollar for 0.9 euro The bank will pay you 0.8 euro for a U.S. dollar. You can buy a U.S. dollar for 10 pesos. The
> Assume that interest rate parity exists. The one-year nominal interest rate in the United States is 7 percent, while the one-year nominal interest rate in Australia is 11 percent. The spot rate of the Australian dollar is $0.60. You will need 10 million
> The one-year interest rate in Singapore is 11 percent. The one-year interest rate in the United States is 6 percent. The spot rate of the Singapore dollar (S$) is $0.50 and the forward rate of the S$ is $0.46. Assume zero transaction costs. a. Does inter
> Jim Logan, owner of the Sports Exports Company, will be receiving about 10,000 British pounds about one month from now as payment for exports produced and sent by his firm. Logan is concerned about his exposure Jim Logan, owner of the Sports Exports Comp
> Explain the concept of triangular arbitrage and the scenario necessary for it to be plausible.
> At the end of this month, you (the owner of a U.S. firm) are meeting with a Japanese firm to which you will try to sell supplies. If you receive an order from that firm, you will obtain a forward contract to hedge the future receivables in yen. As of thi
> The interest rate in Indonesia is commonly higher than the interest rate in the United States, which reflects a high expected rate of inflation there. Why should Nike’s Indonesia-based division consider hedging its future remittances from that country to
> Assume that interest rate parity holds. At the beginning of the month, the spot rate of the Canadian dollar is $0.70, whereas the one-year forward rate is $0.68. Assume that U.S. interest rates increase steadily over the month. At the end of the month, t
> If the U.S. interest rate is close to zero, while the interest rate of Russia is very high, what would interest rate parity suggest about the forward rate of the Russian ruble? Explain.
> Describe a method for testing whether interest rate parity exists. Why are transaction costs, currency restrictions, and differential tax laws important when evaluating whether covered interest arbitrage can be beneficial?
> Assume that the 30-day forward premium of the euro is 1 percent, while the 90-day forward premium of the euro is 2 percent. Explain the likely interest rate conditions that would cause these premiums. Do these conditions ensure that covered interest arbi
> Assume that Mexico’s economy has expanded significantly, creating a high demand for loanable funds there by local firms. How might these conditions affect the forward discount of the Mexican peso?
> The following information is available: You have $500,000 to invest. The current spot rate of the Moroccan dirham is $0.110. The 60-day forward rate of the Moroccan dirham is $0.108 The 60-day interest rate in the United States is 1 percent. The 60-day
> Assume that annual interest rates in the United States are 4 percent, whereas interest rates in France are 6 percent. a. According to IRP, what should the forward rate premium or discount of the euro be? b. If the euro’s spot rate is $1.10, what should
> Blades, Inc., has recently decided to expand its international trade relationship by exporting its roller blades to the United Kingdom. Jogs, Ltd., a British retailer, has committed itself to the annual purchase of 200,000 pairs of Speedos, Bladesâ
> The South African rand has a one-year forward premium of 2 percent. One-year interest rates in the United States are 3 percentage points higher than in South Africa. Based on this information, is covered interest arbitrage possible for a U.S. investor if
> Assume the following information: Given this information, is locational arbitrage possible? If so, explain the steps involved in locational arbitrage, and compute the profit from this arbitrage if you had $1 million to use. What market forces would occu
> Assume that the annual U.S. interest rate is currently 8 percent and Germany’s annual interest rate is currently 9 percent. The euro’s one-year forward rate currently exhibits a discount of 2 percent. a. Does interest rate parity exist? b. Can a U.S. f
> Assume that the one-year U.S. interest rate is 11 percent, whereas the one-year interest rate in Malaysia is 40 percent. Assume that a U.S. bank is willing to purchase the currency of that country from you one year from now at a discount of 13 percent. W
> The one-year interest rate in New Zealand is 6 percent. The one-year U.S. interest rate is 10 percent. The spot rate of the New Zealand dollar (NZ$) is $0.50. The forward rate of the New Zealand dollar is $0.54. Is covered interest arbitrage feasible for
> If the relationship that is specified by interest rate parity does not exist at any period but does exist on average, then covered interest arbitrage should not be considered by U.S. firms. Do you agree or disagree with this statement? Explain.
> Assume that the forward rate premium of the euro was higher last month than it is today. What does this imply about interest rate differentials between the United States and Europe today compared to those last month?
> Assume that the Japanese yen’s forward rate currently exhibits a premium of 6 percent and that interest rate parity exists. If U.S. interest rates decrease, how must this premium change to maintain interest rate parity? Why might we expect the premium to
> Consider investors who invest in either U.S. or British one-year Treasury bills. Assume zero transaction costs and no taxes. a. If interest rate parity exists, then the return for U.S. investors who use covered interest arbitrage will be the same as the
> Why would U.S. investors consider covered interest arbitrage in France when the interest rate on euros in France is lower than the U.S. interest rate?
> At the current time, the Sports Exports Company is willing to receive payments in British pounds for the monthly exports it sends to the United Kingdom. Although all of its receivables are denominated in pounds, it has no payables in pounds or in any oth
> Why do you think the Indonesia rupiah was more exposed to an abrupt decline in value than the Japanese yen during the Asian crisis (even if the home countries’ economies experienced the same degree of weakness)?
> Assume that the existing U.S. one-year interest rate is 10 percent and the Canadian one-year interest rate is 11 percent. Also assume that interest rate parity exists. Should the forward rate of the Canadian dollar exhibit a discount or a premium? If U.S
> Why do you think currencies of countries with high inflation rates tend to have forward discounts?
> Explain the concept of locational arbitrage and the scenario necessary for it to be plausible.
> The Hong Kong dollar’s value is tied to the U.S. dollar. Explain how the following trade patterns would be affected by the appreciation of the Japanese yen against the dollar: (a) Hong Kong exports to Japan and (b) Hong Kong exports to the United State
> Why would the Fed’s indirect intervention have a stronger impact on some currencies than on others? Why would a central bank’s indirect intervention have a stronger impact than its direct intervention does?
> Explain the potential feedback effects of a currency’s changing value on inflation.
> What is the impact of a weak home currency on the home economy, other things being equal? What is the impact of a strong home currency on the home economy, other things being equal?
> Assume there is concern that the United States may experience a recession. How should the Federal Reserve influence the dollar to prevent a recession? How might U.S. exporters react to this policy (favorably or unfavorably)? What about U.S. importing fir
> How can a central bank use indirect intervention to change the value of its home currency?
> a. Explain why one country abandoning the euro could reduce the value of the euro, even if that country accounts for a very small proportion of the total production among all eurozone participants. b. Explain why one country abandoning the euro could af
> Blades, Inc., is currently exporting roller blades to Thailand and importing certain components needed to manufacture roller blades from that country. Under a fixed contractual agreement, Blades’ primary customerin Thailand at a cost of
> a. Explain the dilemma that the ECB faces as it attempts to help countries with large budget deficits. b. Describe the types of conditions that the ECB requires when providing credit to countries that need to resolve their budget deficit problems. c. W
> a. Assume that the Federal Reserve engages in intervention by exchanging a very large amount of Canadian dollars for U.S. dollars in the foreign exchange market. Will this action increase, reduce, or have no effect on Canadian inflation? Briefly explain.
> Assume that the United States has a weak economy and that the Fed wants to correct this problem by adjusting the value of the dollar. The Fed is not worried about inflation. Assume that the eurozone has a somewhat similar economic situation as the United
> How can a central bank use direct intervention to change the value of a currency? Explain why a central bank may desire to smooth the exchange rate movements of its currency.
> Assume that France wants to change the prevailing spot rate of its currency (euro) so as to improve its economy; likewise, Switzerland wants to change the prevailing value of its currency (Swiss franc) so as to improve its economy. Which of these two cou
> The United States, Argentina, and Canada commonly engage in international trade with each other. All the products traded can easily be produced in all three countries. The traded products are always invoiced in the exporting country’s currency. Assume th
> Interest rate parity exists and will continue to exist. The one-year interest rate in the United States and in the eurozone is 6 percent and will continue to be 6 percent. Assume that Denmark’s currency (called the krone) is currently pegged to the euro
> The inflation rate in Yinland was 14 percent last year. The government of Yinland just devalued its currency (the yin) by 40 percent against the dollar. Even though it produces products similar to those of the United States, Yinland has much trade with t
> Assume that Canada decides to peg its currency (the Canadian dollar) to the U.S. dollar and that the exchange rate will remain fixed. Assume that Canada commonly obtains its imports from the United States and Mexico. The United States commonly obtains it
> The country of Zapakar has much international trade with the United States and other countries, as it has no significant barriers on trade or capital flows. Many firms in Zapakar export common products (denominated in Zapakar’s currency, called zaps) tha
> The Sports Exports Company converts British pounds into dollars every month. The prevailing spot rate is about $1.65, but there is much uncertainty about the future value of the pound. Jim Logan, owner of the Sports Exports Company, expects that British
> Assume the Hong Kong dollar (HK$) value is tied to the U.S. dollar and will remain tied to the U.S. dollar. Last month, one HK$ 5 0.25 Singapore dollar. Today, one HK$ 5 0.30 Singapore dollar. Assume that much trade in the computer industry occurs among
> Assume that you expect the European Central Bank to engage in central bank intervention by using euros to purchase a substantial amount of U.S. dollars in the foreign exchange market over the next month. Assume that this direct intervention is expected t
