3. A higher rate of return on equity when using the Capital Asset Pricing Model indicates...

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3. A higher rate of return on equity when using the Capital Asset Pricing Model indicates that risk is: a. Higher b. Lower C. There is no connection between risk and return d. A higher price for the stock results from higher required returns on equity 4. The Capital Asset Pricing Model is considered a form of: a. Fundamental Analysis b. Economic Analysis c. Technical Analysis d. Ratio Analysis Value or Price gi QUESTION 4 (UNIT 2) (25 MARKS) a) b) c) d) Assume the following information: Bank JP Morgan Bank Well Fargo Bid Price of New Zealand Dollar USD0.6533 USD0.6503 Justify whether locational arbitrage is possible. If so, explain the steps involved in locational arbitrage, and estimate the profit from this arbitrage if you had USD1,000,000 to use. Discuss market forces factors that would occur to eliminate any further possibilities of locational arbitrage. (6 marks) Currency Pair Value of Canadian Dollar (CAD) in US Dollars (USD) Value of New Zealand Dollar (NZD) in US Dollars (USD) Value of Canadian Dollar in New Zealand Dollars (NZD) Ask Price of New Zealand Dollar USD0.6563 USD0.6523 Quoted Price USD0.7381 Currency pairs and Interest Rate Spot Rate of Canadian Dollar (CAD) 90-day forward rate of Canadian dollar 90-day Canadian interest rate 90-day U.S. interest rate USD0.6537 NZD1.1305 Referring to the information given, explain the steps that would reflect triangular arbitrage. If you had USD2,500,000 to use in triangular arbitrage, compute the profit from this strategy. Justify the steps taken to prevent any further possibilities of triangular arbitrage. (7 marks) Given the following information, calculate the yield (percentage return) to a U.S. investor who used covered interest arbitrage. Assume the investor invests USD2,000,000 determine the profit or loss in this transaction. You are required to analyse the market forces determinants occur in order to protect from any further possibilities of covered interest arbitrage. Quoted Price USD0.7381 USD0.7252 3.25% 1.75% (8 marks) Assume that interest rate parity exists. You expect that the one-year nominal interest rate in the U.S. is 1.995%, while the one-year nominal interest rate in Australia is 3.695%. The spot rate of the Australian dollar is USD0.6939. You will need 15 million Australian Dollars in one year. Today, you purchase a one-year forward contract in Australian Dollars. Estimate how many U.S. Dollars (USD) will you need in one year to fulfill your forward contract. (4 marks) [ A(n) occurs when two parties agree to an exchange at a particular exchange rate at some at some point in the future. Forward exchange Spot excahnge Carry trade Arbitrage QUESTION 5 Determinants of Exchange rates include: Interest rates and inflation rates (nominal interest rate) Investor psychology Government policy (floating, fixed etc) All of the above 3. A higher rate of return on equity when using the Capital Asset Pricing Model indicates that risk is: a. Higher b. Lower C. There is no connection between risk and return d. A higher price for the stock results from higher required returns on equity 4. The Capital Asset Pricing Model is considered a form of: a. Fundamental Analysis b. Economic Analysis c. Technical Analysis d. Ratio Analysis Value or Price gi QUESTION 4 (UNIT 2) (25 MARKS) a) b) c) d) Assume the following information: Bank JP Morgan Bank Well Fargo Bid Price of New Zealand Dollar USD0.6533 USD0.6503 Justify whether locational arbitrage is possible. If so, explain the steps involved in locational arbitrage, and estimate the profit from this arbitrage if you had USD1,000,000 to use. Discuss market forces factors that would occur to eliminate any further possibilities of locational arbitrage. (6 marks) Currency Pair Value of Canadian Dollar (CAD) in US Dollars (USD) Value of New Zealand Dollar (NZD) in US Dollars (USD) Value of Canadian Dollar in New Zealand Dollars (NZD) Ask Price of New Zealand Dollar USD0.6563 USD0.6523 Quoted Price USD0.7381 Currency pairs and Interest Rate Spot Rate of Canadian Dollar (CAD) 90-day forward rate of Canadian dollar 90-day Canadian interest rate 90-day U.S. interest rate USD0.6537 NZD1.1305 Referring to the information given, explain the steps that would reflect triangular arbitrage. If you had USD2,500,000 to use in triangular arbitrage, compute the profit from this strategy. Justify the steps taken to prevent any further possibilities of triangular arbitrage. (7 marks) Given the following information, calculate the yield (percentage return) to a U.S. investor who used covered interest arbitrage. Assume the investor invests USD2,000,000 determine the profit or loss in this transaction. You are required to analyse the market forces determinants occur in order to protect from any further possibilities of covered interest arbitrage. Quoted Price USD0.7381 USD0.7252 3.25% 1.75% (8 marks) Assume that interest rate parity exists. You expect that the one-year nominal interest rate in the U.S. is 1.995%, while the one-year nominal interest rate in Australia is 3.695%. The spot rate of the Australian dollar is USD0.6939. You will need 15 million Australian Dollars in one year. Today, you purchase a one-year forward contract in Australian Dollars. Estimate how many U.S. Dollars (USD) will you need in one year to fulfill your forward contract. (4 marks) [ A(n) occurs when two parties agree to an exchange at a particular exchange rate at some at some point in the future. Forward exchange Spot excahnge Carry trade Arbitrage QUESTION 5 Determinants of Exchange rates include: Interest rates and inflation rates (nominal interest rate) Investor psychology Government policy (floating, fixed etc) All of the above

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For Question 1 The correct answer is a Higher According to the Capital Asset Pricing Model CAPM the rate of return on equity is directly related to the risk of an investment The CAPM calculates the re... View the full answer