# Finance H.W.

1. You observed the bid rate of a New Zealand dollar is \$.3325 while the ask rate is \$.3342 at Bank X. The bid rate of the New Zealand dollar is \$.3232 while the ask rate is \$.3249 at Bank Y. What would be your dollar amount profit if you use \$2,000,000 to execute locational arbitrage?

2. The following is market information:

Current spot rate of pound

=

\$1.47

90-day forward rate of pound

=

\$1.49

3-month deposit rate in U.S.

=

1.1%

3-month deposit rate in Great Britain

=

1.3%

If you have \$100,000 and use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have after 90 days?

3. Assume the following information:

Current spot rate of Australian dollar

=

\$.90

Forecasted spot rate of Australian dollar 1 year from now

=

\$.88

1-year forward rate of Australian dollar

=

\$.91

Annual interest rate for Australian dollar deposit

=

3%

Annual interest rate in the U.S.

=

2%

What is your percentage return from covered interest arbitrage with \$500,000?

4.The inflation rate in the U.S. is 3%, while the inflation rate in Japan is 2%. The current exchange rate is \$1 equal to 101 Japanese yen. If purchasing power parity condition is existed, what is the new exchange rate for the yen?

5. The interest rate in the U.K. is 2%, while the interest rate in the U.S. is 1.5%. The spot rate for the British pound is \$1.45. According to the international Fisher effect (IFE), what is new level of the British pound?

6. Bronco Co. is a U.S.-based MNC that has subsidiaries in Spain and Germany. Both subsidiaries frequently remit their earnings back to the parent company. The Spain subsidiary generated a net outflow of 1,000,000 this year, while the German subsidiary generated a net inflow of 2,500,000. What is the net inflow or outflow as measured in U.S. dollars this year? The exchange rate for the euro is \$1.27.

7. If one-year nominal interest rate in the U.S. is 3%, while the one-year nominal interest rate in Australia is 5%. The spot rate of the Australian dollar is \$.96. Interest Parity is held. You will need 5 million Australian dollars in one year. Today, you purchase a one-year forward contract in Australian dollars. How many U.S. dollars will you need in one year to fulfill your forward contract?

8. Today, the one-year U.S. interest rate is 2%, while the one-year interest rate in Mexico is 6%. The spot rate of the Mexico peso (MXP) is \$.08 The one-year forward rate of the MXP exhibits a 11% discount. Determine the yield (percentage return on investment) to an investor from Mexico who engages in covered interest arbitrage.

9. Current one-year interest rates in Europe is 2 percent, while one-year interest rates in the U.S. is 1.5 percent. You convert \$100,000 to euros and invests them in France. One year later, you convert the euros back to dollars. The current spot rate of the euro is \$1.28.

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 \$1.20, what is your percentage return from your investment?

c.   If the spot rate of the euro in one year is \$1.35, what is your percentage return from your investment?

d.   What must the spot rate of the euro be in one year for your strategy to be successful?

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