Advanced Accounting
12th Edition
ISBN: 9781305084858
Author: Paul M. Fischer, William J. Tayler, Rita H. Cheng
Publisher: Cengage Learning
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Question
Chapter 10, Problem 2.4E
To determine
Forward contract:
A forward contract is an agreement where the deal has been committed to exchange the two currencies at a specified rate at a specified point of time. The rate of exchange of two currencies has been determined in advance and it may be different from the spot rate existing at that specified point of time.
:
Comment on the reason for the increase in exports with the depreciated value of the dollar.
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(Problem 3) Currently, the spot exchange rate is $1.50/£ and the three-month forward exchange rate is $1.52/£. 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 $1,500,000 or £1,000,000.
1. Determine whether the interest rate parity is currently holding (just enter either yes or no):
2. If the IRP is not holding, compute and enter the total amount of arbitrage profit in dollars
round to zero decimal. A positive number means profit. A negative number means loss)
3. If the IRP is not holding, compute and enter the total amount of arbitrage profit in pound
i.e., round to zero decimal. A positive number means profit. A negative number means loss)
(just enter yes or no)
(if your profit is $2,000.00, just enter "2,000", i.e.,
(if your profit is 2,000.00 pound, just enter "2,000",
Use the information below to answer the following questions.
Canada dollar
6-months forward
Japan Yen
6-months forward
U.K. Pound
6-months forward
Currency per U.S. $
1.2375
1.2358
100.3100
100.0700
0.6794
0.6779
Suppose interest rate parity holds, and the current risk-free rate in the United
States is 4 percent per six months.
Requirement 1:
What must the six-month risk-free rate be in Canada?
[Select]
[Select]
Requirement 2:
What must the six-month risk-free rate be in Japan?
[Select]
Requirement 3:
What must the six-month risk-free rate be in Great Britain?
Use the information below to answer the following questions.
Currency per U.S. $
1.2380
1.2353
Australia dollar
6-months forward
Japan Yen
6-months forward
U.K. Pound
6-months forward
100.3600
100.0200
.6789
.6784
Suppose interest rate parity holds, and the current six month risk-free rate in the United
States is 5 percent. Use the approximate interest rate parity equation to answer the
following questions.
a. What must the six-month risk-free rate be in Australia? (Enter your answer as a
percent rounded to 2 decimal places, e.g., 32.16.)
b. What must the six-month risk-free rate be in Japan? (Enter your answer as a percent
rounded to 2 decimal places, e.g., 32.16.)
a. Australian risk-free rate
b. Japanese risk-free rate
c. Great Britain risk-free rate
c. What must the six-month risk-free rate be in Great Britain? (Enter your answer as a
percent rounded to 2 decimal places, e.g., 32.16.)
%
%
%
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Similar questions
- Match each term in Column A with its related definition in Column B. Column A 1. ____________ Spot rate 2. ____________ Currency appreciation 3. ____________ Translation risk 4. ____________ Transaction risk 5. ____________ Exchange rate Column B a. The rate at which one currency can be traded for another currency. b. The possibility that future cash transactions will be affected by changing exchange rates. c. A month ago, 1 U.S. was worth 8.5 Mexican pesos. Today, 1 is worth 9.0 Mexican pesos. The U.S. dollar has undergone what? d. The degree to which a firms financial statements are exposed to exchange rate fluctuation. e. The exchange rate of one currency for another for immediate delivery (today).arrow_forwardThe next two questions are based on the following information Consider the following prices in the international money markets: Spot rate: USD1.275/GBP One-year Forward rate: USD1.364/GBP Interest Rate (UK): 2.39% Interest Rate (US): 11.66% Assuming no transaction costs, which of the following statements is true? An arbitrage can be obtained by borrowing in the currency that is expressing the other currency. An arbitrage can be obtained by investing in the currency that is expressing the other currency. An arbitrage can be obtained by borrowing in the currency that is being expressed by the other currency. O d. An arbitrage cannot be obtained by investing in the currency that is being expressed by the other currency. O e. None of the option in this question are correct. O a. O b. O c. What should the forward rate be for the International Fisher Effect to hold? GBP1.4875/USD GBP1.3904/USD USD1.3904/GBP d. USD1.4875/GBP O e. None of the options in this question. a. O b. Ocarrow_forwardPleasearrow_forward
- If the current exchange rate is $1.70/£, the one-year forward exchange rate is $1.80/£, and the interest rate on British government bills is 5% per year, what risk-free dollar-denominated return can be locked in by investing in the British bills? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Risk-free dollar-denominated return %arrow_forwardMatch each term in Column A with its related definition in Column B.Column A1. Spot rate2. Currency appreciation3. Translation risk4. Transaction risk5. Exchange rateColumn Ba. The rate at which one currency can be traded for another currency.b. The possibility that future cash transactions will be affected by changing exchange rates.c. A month ago, $1 U.S. was worth 8.5 Mexican pesos. Today, $1 is worth 9.0 Mexicanpesos. The U.S. dollar has undergone what?d. The degree to which a firm’s financial statements are exposed to exchange ratefluctuation.e. The exchange rate of one currency for another for immediate delivery (today).arrow_forwardThe yield on a 1-year bill in the U. K. is 7% and the present exchange rate is 1 pound = U. S. $1.65. If you expect the exchange rate to be 1 pound = U. S. $1.45 a year from now, the return a U. S. investor can expect to earn by investing in U. K. bills is a. 6.7% b. 3.2% c. 8% d. 5.97%arrow_forward
- K1. A Polish currency dealer has good credit and can borrow either €1,600,000 or $2,000,000 for one year. The one-year interest rate in the U.S. is i$ = 6% and in the euro zone the one-year interest rate is i€ = 2%. The spot exchange rate is $1.20 = €1.00 and the one-year forward exchange rate is $1.25 = €1.00. Show how you can realize a certain euro profit via covered interest arbitrage. Group of answer choices Borrow $2,000,000 at 6%; trade $2,000,000 for €1,666,667 at the spot rate; invest euros at i€ = 2%; translate euro proceeds back to dollars at the forward rate of $1.25 = €1.00 for gross proceeds of $2,125,000. Net profit will be $5,000. Borrow $2,000,000 at 6%; trade $2,000,000 for €800,000 at the spot rate; invest euros at i€ = 2%; translate euro proceeds back to dollars at the forward rate of $1.20 = €1.00. Net profit will be $17,600. Borrow €1,600,000 at i€ = 2%; translate euros to dollars at the spot rate, invest dollars in the U.S. at i$ = 6% for one year;…arrow_forwardCurrently, the GBP/USD rate is 1.5011 and the six-month forward exchange rate is 1.5261. The six-month interest rate is 7.6% per annum in the U.S. and 5.7% per annum in the U.K. Assume that you can borrow £1,000,000 or its equivalent in USD. How much do you make/lose if you borrow the foreign currency and invest locally? (USD, no cents)arrow_forwardThe interest rate in Japan is 0.5% and the interest rate in the US is 4.5%. The spot exchange rate is ¥100 per dollar and the one year ahead forward rate is ¥98 per dollar. What is the profit made via covered interest arbitrage if you start by borrowing 1 million yen and investing in the US market? Assume borrowing and lending rates are identical. State the profits in dollars.arrow_forward
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