3. The following information relates to interest rates and exchange rates in China and the EU....

 

Transcribed Image Text:

3. The following information relates to interest rates and exchange rates in China and the EU. REQUIRED: (a) (b) (c) INTEREST RATES (% p.a.) EUR 12 Months -0.4575 SPOT EXCHANGE RATE EUR/CNH 7.1829 FORWARD POINTS 12 Months 2667.2134 CNH 2.7380 Use the Uncovered Interest Parity relationship (UIP) to calculate the expected EUR/CNH spot rate in 12 months' time. (4 marks) Assume that you borrow 10,000,000 of your chosen currency. Calculate all the steps involved in the carry trade and calculate the break-even spot exchange rate for the trade. (4 marks) Explain the requirements for the carry trade between the EU and China to be profitable. Discuss the reasons why you believe this may happen. (9 marks) 3. The following information relates to interest rates and exchange rates in China and the EU. REQUIRED: (a) (b) (c) INTEREST RATES (% p.a.) EUR 12 Months -0.4575 SPOT EXCHANGE RATE EUR/CNH 7.1829 FORWARD POINTS 12 Months 2667.2134 CNH 2.7380 Use the Uncovered Interest Parity relationship (UIP) to calculate the expected EUR/CNH spot rate in 12 months' time. (4 marks) Assume that you borrow 10,000,000 of your chosen currency. Calculate all the steps involved in the carry trade and calculate the break-even spot exchange rate for the trade. (4 marks) Explain the requirements for the carry trade between the EU and China to be profitable. Discuss the reasons why you believe this may happen. (9 marks)

Answer rating: 100% (QA)

a Using the Uncovered Interest Parity UIP relationship we have F S1 fracrEUR100ightt1 fracrCNH100ightt Where F is the forward exchange rate S is the s... View the full answer