1. 2. The spot exchange rate is $1.50/. The three-month forward exchange rate is $1.52/. The...

 

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1. 2. The spot exchange rate is $1.50/. The three-month forward exchange rate is $1.52/. The 3-month interest rate is 8.0% per annum in the U.S. and 5.8% per annum in the U.K. Investors can borrow either $1,500,000 or the equivalent amount at the current spot rate. (1) A US. MNC would like to invest its extra cash reserve of $1,500,000 for 3 months. How should the extra cash reserve be invested? Explain with calculations. (2) Describe the covered interest arbitrage (CIA) by a dollar-based investor if such opportunity exists. Calculate the investor's CIA profit if any. (3) Describe the covered interest arbitrage (CIA) by a pound-based investor if such opportunity exists. Calculate the investor's CIA profit if any. (4) Based on the given information, specify how CIA activities help restore the market equilibrium described by interest rate parity (IRP). The current price level in the U.S. is $14,000 per consumption bundle, and 10,000 per consumption bundle in the U.K.. The spot rate is $1.65/. The annual inflation rate is expected to be 2% in the U.S. and 5% in the U.K. (1) Assume depreciates against dollar by 4% in the next year. Discuss with calculations: a. The impact on GBP's purchasing power of U.S. goods in the next year C. The impact on GBP's purchasing power of U.K. goods in the next year Which country's competitiveness improves in the next year? Explain. (2) If there is no change to the import/export between the U.S. and the U.K. at the end of the next year, calculate the % change of the value of USD in the next year based on relative purchasing power parity. Show both the calculation and the answer. 1. 2. The spot exchange rate is $1.50/. The three-month forward exchange rate is $1.52/. The 3-month interest rate is 8.0% per annum in the U.S. and 5.8% per annum in the U.K. Investors can borrow either $1,500,000 or the equivalent amount at the current spot rate. (1) A US. MNC would like to invest its extra cash reserve of $1,500,000 for 3 months. How should the extra cash reserve be invested? Explain with calculations. (2) Describe the covered interest arbitrage (CIA) by a dollar-based investor if such opportunity exists. Calculate the investor's CIA profit if any. (3) Describe the covered interest arbitrage (CIA) by a pound-based investor if such opportunity exists. Calculate the investor's CIA profit if any. (4) Based on the given information, specify how CIA activities help restore the market equilibrium described by interest rate parity (IRP). The current price level in the U.S. is $14,000 per consumption bundle, and 10,000 per consumption bundle in the U.K.. The spot rate is $1.65/. The annual inflation rate is expected to be 2% in the U.S. and 5% in the U.K. (1) Assume depreciates against dollar by 4% in the next year. Discuss with calculations: a. The impact on GBP's purchasing power of U.S. goods in the next year C. The impact on GBP's purchasing power of U.K. goods in the next year Which country's competitiveness improves in the next year? Explain. (2) If there is no change to the import/export between the U.S. and the U.K. at the end of the next year, calculate the % change of the value of USD in the next year based on relative purchasing power parity. Show both the calculation and the answer.

Answer rating: 100% (QA)

1 Investing the 1500000 cash reserve 1 Investment of the 1500000 cash reserve The US MNC should invest the 1500000 cash reserve in the US as the 3mont... View the full answer