1. Assume annualized interest rates in the U.S. and Australia are 4% and 10%, respectively, and...
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1. Assume annualized interest rates in the U.S. and Australia are 4% and 10%, respectively, and the Australian dollar can be exchanged for $0.78. (a) According to covered interest parity (CIP), is the Australian dollar quoted at a for- ward discount or at a forward premium at the 180-day maturity? Use approximate CIP. (b) Under no arbitrage, what is the 180-day forward rate for the Australian dollar EB)? (c) Under no arbitrage, what is the 180-day forward rate for the U.S. dollar (B USD AUD AUD? 2. Consider Problem 1, again. (a) Does uncovered interest parity predict an appreciation or depreciation of the Aus- tralian dollar against the U.S. dollar over the next 180 days? (b) Assume 180 days later the Australian dollar is exchanged for $0.90. Could an in- vestor make arbitrage profit over the 180-day period? Why? Describe the strategy and quantify the profit. (c) Given b), was the 180-day forward rate a good predictor of the future spot rate? Why? 1. Assume annualized interest rates in the U.S. and Australia are 4% and 10%, respectively, and the Australian dollar can be exchanged for $0.78. (a) According to covered interest parity (CIP), is the Australian dollar quoted at a for- ward discount or at a forward premium at the 180-day maturity? Use approximate CIP. (b) Under no arbitrage, what is the 180-day forward rate for the Australian dollar EB)? (c) Under no arbitrage, what is the 180-day forward rate for the U.S. dollar (B USD AUD AUD? 2. Consider Problem 1, again. (a) Does uncovered interest parity predict an appreciation or depreciation of the Aus- tralian dollar against the U.S. dollar over the next 180 days? (b) Assume 180 days later the Australian dollar is exchanged for $0.90. Could an in- vestor make arbitrage profit over the 180-day period? Why? Describe the strategy and quantify the profit. (c) Given b), was the 180-day forward rate a good predictor of the future spot rate? Why?
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Related Book For
Microeconomics
ISBN: 9781464146978
1st edition
Authors: Austan Goolsbee, Steven Levitt, Chad Syverson
Posted Date:
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