FIN4802 NEW Assignment 1 Solutions (SEM 1 2022)

UNISA




International Financial Management
2022 FIN4802 Assignment 1

, 38965550 FIN4802 Assignment 1 Unique number: 815813




QUESTION 1
1.1 Interest rate party is not holding.
(1+ US interest rate) = 1.00625 AND (F/s) (1 + CAD interest rate) = (0.8388/0.8298) (1.01875) =
1.02980
Left and right sides of IRP are not equal, IRP is not holding.


1.2 Interest rate party is not holding, there is an arbitrage opportunity because 1.00625 < 1.02980.

Borrow: 1000000 at 1.25% per year. Pay back 1000000 x (1 + 0.0125) = 1012500
Convert: 1000000 to CAD at the spot rate = CAD1205100
Lend CAD 1205100 x interest rate = CAD 1250291.25 will receive back
Sell CAD 1250291.25 = CAD 1250291..1922 = $1048726.095

Profit = 1048726.095 - 1012500 = 36226.09461