Suppose that at the end of September 2008, the exchange rate between HKD and USD was...

 

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Suppose that at the end of September 2008, the exchange rate between HKD and USD was 8 HKD per USD. The Hong Kong government promised that the exchange rate would remain 8 HKD per USD for at least one year. The semi-annually coumpounded risk-free interest rate in the US was 1% per annum. (1) What should the forward exchange rate for HKD and USD with maturity at the end of March 2009 be at the end of September 2008? You do not need to form portfolios here, and some simple argument should suffice. (2) What was the implied risk-free interest rate in Hong Kong at the end of September 2008? You should use equations to argue why this is the case. (3) Suppose that at the end of September 2008, the risk-free rate in Euro Zone was 1% per annum, semi-annually compounded. The spot exchange rate between Euro and USD was 1 USD per Euro. The forward rate for end-of-March 2009 delivery was 1.02 USD per Euro. Suppose that the market was perfect and you could freely borrow and lend at risk-free rates, design a trading strategy to take advantage of the arbitrage opportunity. (4) Following (3), what was the semi-annually compounded 'shadow' interest rate of borrowing USD as implied by CIP? Define the difference between the 'shadow' interest rate and the market interest rate in US as the convenience yield, what was the convenience yield for holding US Treasury at the end of September 2008? The difference between the semi-annually compounded rates should suffice. Suppose that at the end of September 2008, the exchange rate between HKD and USD was 8 HKD per USD. The Hong Kong government promised that the exchange rate would remain 8 HKD per USD for at least one year. The semi-annually coumpounded risk-free interest rate in the US was 1% per annum. (1) What should the forward exchange rate for HKD and USD with maturity at the end of March 2009 be at the end of September 2008? You do not need to form portfolios here, and some simple argument should suffice. (2) What was the implied risk-free interest rate in Hong Kong at the end of September 2008? You should use equations to argue why this is the case. (3) Suppose that at the end of September 2008, the risk-free rate in Euro Zone was 1% per annum, semi-annually compounded. The spot exchange rate between Euro and USD was 1 USD per Euro. The forward rate for end-of-March 2009 delivery was 1.02 USD per Euro. Suppose that the market was perfect and you could freely borrow and lend at risk-free rates, design a trading strategy to take advantage of the arbitrage opportunity. (4) Following (3), what was the semi-annually compounded 'shadow' interest rate of borrowing USD as implied by CIP? Define the difference between the 'shadow' interest rate and the market interest rate in US as the convenience yield, what was the convenience yield for holding US Treasury at the end of September 2008? The difference between the semi-annually compounded rates should suffice.

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1 Since the Hong Kong government promised that the exchange rate would remain at 8 HKD per USD for at least one year the forward exchange rate for HKD and USD with maturity at the end of March 2009 sh... View the full answer