FINA 4500 Exam Questions with 100% Correct
Answers
Currently, the spot exchange rate is $1.60 per £ and the three-month forward exchange
rate is $1.62 per £. The three-month interest rate is 8.0% per annum in the U.S. and
5.8% per annum in the U.K. Assume that you can borrow as much as $1,600,000 or
£1,000,000.
Determine whether the interest rate parity is currently holding.
- No
If the IRP is not holding, how would you carry out covered interest arbitrage? What
will be your arbitrage profit?
- Borrow in the U.S and invest in the U.K Hedge exchange rate risk by selling British pounds
forward
- Arbitrage profit : $11490
Explain how the IRP will be restored as a result of covered arbitrage activities.
-Covered arbitrage activitiesThe dollar interest rate will rise; The pound interest rate will fall;
The spot exchange rate will rise; The forward exchange rate will fall.
Currently, the spot exchange rate is $0.76 per A$ and the one-year forward exchange
rate is $0.72 per A$. One-year interest is 3.5% in the United States and 4.2% in
Australia. You may borrow up to $1,000,000 or A$1,315,789, which is equivalent to
$1,000,000 at the current spot rate
Determine if IRP is holding between Australia and the United States.
- No
, If IRP is not holding, explain in detail how you would realize certain profit in U.S.
dollar terms. What will be your arbitrage profit?
- Profit in U.S. dollar terms :Borrow in Australia and invest in the U.S. Hedge exchange rate
risk by buying Australian dollars forward.
-Arbitrage profit : 47842
Explain how IRP will be restored as a result of arbitrage transactions you carry out
above.
Arbitrage transactions: The U.S. dollar interest rate will fall; The Australian dollar interest
rate will rise; The spot exchange rate will fall; The forward exchange rate will rise.
In the October 23, 1999 issue, the Economist reports that the interest rate per annum is
5.94% in the United States and 70.5% in Turkey. Why do you think the interest rate is
so high in Turkey? Based on the reported interest rates, how would you predict the
change of the exchange rate between the U.S. dollar and the Turkish lira according to
international Fisher effect?
A high Turkish interest rate must reflect a high expected _________blank in Turkey.
- Interest rate reflects : inflation
The expected appreciation or depreciation of the Turkish lira against the U.S. dollar
according to international Fisher effect:
-64.54 ( 5.94%-70.5%)= -64.56%
Suppose that the current spot exchange rate is €1.555 per £ and the one-year forward
exchange rate is €1.65 per £. The one-year interest rate is 5.4% in euros and 5.2% in
Answers
Currently, the spot exchange rate is $1.60 per £ and the three-month forward exchange
rate is $1.62 per £. The three-month interest rate is 8.0% per annum in the U.S. and
5.8% per annum in the U.K. Assume that you can borrow as much as $1,600,000 or
£1,000,000.
Determine whether the interest rate parity is currently holding.
- No
If the IRP is not holding, how would you carry out covered interest arbitrage? What
will be your arbitrage profit?
- Borrow in the U.S and invest in the U.K Hedge exchange rate risk by selling British pounds
forward
- Arbitrage profit : $11490
Explain how the IRP will be restored as a result of covered arbitrage activities.
-Covered arbitrage activitiesThe dollar interest rate will rise; The pound interest rate will fall;
The spot exchange rate will rise; The forward exchange rate will fall.
Currently, the spot exchange rate is $0.76 per A$ and the one-year forward exchange
rate is $0.72 per A$. One-year interest is 3.5% in the United States and 4.2% in
Australia. You may borrow up to $1,000,000 or A$1,315,789, which is equivalent to
$1,000,000 at the current spot rate
Determine if IRP is holding between Australia and the United States.
- No
, If IRP is not holding, explain in detail how you would realize certain profit in U.S.
dollar terms. What will be your arbitrage profit?
- Profit in U.S. dollar terms :Borrow in Australia and invest in the U.S. Hedge exchange rate
risk by buying Australian dollars forward.
-Arbitrage profit : 47842
Explain how IRP will be restored as a result of arbitrage transactions you carry out
above.
Arbitrage transactions: The U.S. dollar interest rate will fall; The Australian dollar interest
rate will rise; The spot exchange rate will fall; The forward exchange rate will rise.
In the October 23, 1999 issue, the Economist reports that the interest rate per annum is
5.94% in the United States and 70.5% in Turkey. Why do you think the interest rate is
so high in Turkey? Based on the reported interest rates, how would you predict the
change of the exchange rate between the U.S. dollar and the Turkish lira according to
international Fisher effect?
A high Turkish interest rate must reflect a high expected _________blank in Turkey.
- Interest rate reflects : inflation
The expected appreciation or depreciation of the Turkish lira against the U.S. dollar
according to international Fisher effect:
-64.54 ( 5.94%-70.5%)= -64.56%
Suppose that the current spot exchange rate is €1.555 per £ and the one-year forward
exchange rate is €1.65 per £. The one-year interest rate is 5.4% in euros and 5.2% in
