The three-month dollar interest rate in New York is 5% per annum. Alternatively, the three-month euro interest rate in Frankfort is 8% p.a. The current $/€ spot exchange rate is $1.1320/€. The euro three-month forward rate is quoted at $1.1346/€.
A. Show how a U.S. arbitrageur would exploit a possible covered interest arbitrage opportunity with a nominal $50,000,000. Don’t start with the formula. Explain the transactions the arbitrageur would execute and calculate the profit/loss the arbitrager would make or face.
B. Use the Interest Rate Parity formula (IRP) to show whether the interest rate parity condition is violated. If violated, at what 3-month forward rate would it hold?
C. Use the International Fisher Effect (IFE) to find what should be the expected three-month spot exchange rate of dollars against the euro (If not performing chain calculations, use interest rates up to four decimal places).
D. Assume that the real rate of interest in both the euro zone and the U.S. is 1.6% per annum; use the Fisher Effect (FE) to calculate the expected annualized three-month rates of inflation in the euro zone and the U.S. (Expressed as a % p.a. up to four decimal places).
E. Use the results in question 4 above and the Relative Purchasing Power Parity (RPPP) formula to estimate the expected three-month spot exchange rate of the dollars against the euro.
Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.
You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.Read more
Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.Read more
Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.Read more
Your email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.Read more
By sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.Read more