3. Suppose a Canadian agent (investor) with C$1.0 million is choosing between bank deposits denominated in either euro or Canadian dollars. Also suppose that the (one-year) interest rate paid on the C$ deposits is 1% (0.01) and on the euro deposit is 2% (0.02), the (one-year) forward C$-EURO exchange rate (Fcs/e) is 1.60 and the current spot rate (Ecs/e) is 1.65. Based on this information, answer the following questions. (a) What is the forward spread? Is the Canadian dollar at forward premium or discount? And by how much (%)? (b) What is the (hedged = riskless) rate of return on the euro bonds? (c) Based on your answer above, is there an arbitrage opportunity between the two deposits? Explain why or why not. (d) If the spot rate of exchange as well as the interest rates are kept at their current levels (stated above), what will be equilibrium forward rate as implied by the covered interest parity theory ?

3. Suppose a Canadian agent (investor) with C$1.0 million is choosing between bank deposits denominated in either euro or Canadian dollars. Also suppose that the (one-year) interest rate paid on the C$ deposits is 1% (0.01) and on the euro deposit is 2% (0.02), the (one-year) forward C$-EURO exchange rate (Fcs/e) is 1.60 and the current spot rate (Ecs/e) is 1.65. Based on this information, answer the following questions. (a) What is the forward spread? Is the Canadian dollar at forward premium or discount? And by how much (%)? (b) What is the (hedged = riskless) rate of return on the euro bonds? (c) Based on your answer above, is there an arbitrage opportunity between the two deposits? Explain why or why not. (d) If the spot rate of exchange as well as the interest rates are kept at their current levels (stated above), what will be equilibrium forward rate as implied by the covered interest parity theory ?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

The euro-pound cross exchange rate can be computed as: A. S(E/E) = S($/E) × S(€/S) %3D B. S($/£) S(E/S) S(€/£) = S(€/£) = S($/€) S(£/S) D. all of the above
The Central American country of Belize is one of approximately 14 Caribbean community countries that pegs its currency to the U.S. dollar. The pegged rate is 2 Belize dollars equal 1 U.S. dollar (2 BZD = 1 USD or 1 BZD = 0.50 USD). This is illustrated in the figure below. Exchange Rate (USD BZD) 2.00 1.00 0.50 D Quantity of Belize dollars traded per day How will the actions of speculators affect this market? O The Belize dollar supply curve will shift to the right and the Belize dollar demand curve will shift to the left. O The Belize dollar supply curve and the Belize dollar demand curve will shift to the right. O The Belize dollar supply curve will shift to the left and the Belize dollar demand curve shift to the right. The Belize dollar supply curve and the Belize dollar demand curve will shift to the left.
A British money financier is managing €10 million and wants to invest it in safe bonds either in France or United Kingdom for one year. The one-year interest rate on such assets is 0.63% in Britain and 0% in France. The one-year forward euro-pound exchange rate is 1.121 €/£ (euros per pound). Assume that the covered interest parity condition (CIP) always holds and to ensure consistency, treat the UK as home country. What is the current euro-pound spot exchange rate?
A British money financier is managing €10 million and wants to invest it in safe bonds either in France or United Kingdom for one year. The one-year interest rate on such assets is 0.63% in Britain and 0% in France. The one-year forward euro-pound exchange rate is 1.121 €/£ (euros per pound). Assume that the covered interest parity condition (CIP) always holds and to ensure consistency, treat the UK as home country. What is the current euro-pound spot exchange rate? Explain and show your work.
Let’s suppose you (USA dealer) imported one Earth Equipment machine from German dealer on March 1, 2017 at € 300,000 each, payable in 30 days. The exchange rate on March 1, 2017 was 1.16 US$/€. Then you sold the machine in the US market at US$350,000 in cash on March 29, 2017. On April 1, 2017, you paid to Italian car dealer at the exchange rate of 1.19 US$/€. What was profit or loss from this business in terms of US$? (Please assume all costs are included in price.) Group of answer choices -7000 -9200 -4500 -10200
Let’s suppose you (USA dealer) imported a product from German on Dec 1, 2018 at € 300, payable in 60 days. You sold the product in the US market at $400 in cash on Dec 15, 2018. The company's fiscal year ends on Dec 31. You paid to your German supplier on Feb 1, 2019. Below, please find the exchange rate information: Dec 1, 2018: 0.8 €/$.. Dec 31, 2018: 1.5 €/$. Feb 1, 2019: 0.6 €/$. What was net income for 2018 and 2019, respectively? Group of answer choices -$200, -$100 -$100, $200 $300, -$200 $200, -$300
- Which of the following is not included as one of the component values of an SDR? British Pound U.S. Dollar Japanese Yen Swiss Franc
Jetta production cost in 2002 and 2003 was 8,500 Euro per Jetta. Jettas were sold in US at $12,000 in 2002 and 2003. Forward hedge exchange rate was 1 $/Euro in 2003. The market exchange rate was 1.83 $/Euro (i.e. rate without hedge) in 2003. If 1,500 Jetta were sold in US, in 2003, by 40% forward hedge and 60% not hedged. What would be profits or loss from sales of 1,500 Jetta in US? € 351,639 €1, 281,946 € 1,291,661 € 362,259
A UK-manufactured car sells for GBP 14.000. A french-manufactured car sells for EUR 15.750. If the EUR/GBP exchange rate is 1.17, how much does the british-made car cost in EUR? a. 18.427 b. 11.965 c. 13.462 d. 16.380
The Korean Won has fallen nearly 20% over the past year relative to the US$: If the uncovered interest parity theory were correct, what should Korean interest rates have been one year ago if rates in the U.S. were 10%: (a) 10%; (b) 20%; (c) 30%; (d) 0 Please show work
A certain commodity cost 0.5 pound sterling in the United Kingdom. In U.S. denominated dollars, this same item can be purchased for 85 cents. The exchange rate is 1 pound sterling = $1.80 U.S. Solve, a.Should this commodity be purchased in the United Kingdom or in the United States? b. If 100,000 items comprise the purchase quantity, how much can be saved in view of your answer to Part (a)?
Your U.S. firm made a euro denominated investment three months ago. The investment is maturing today and the firm will receive EUR 700,000, and you are going to exchange the euros for USD. The spot exchange rate is EUR/USD 1.0609. How much the firm receive in USD?