# (a) Assume the following information: Spot rate of = $1.60 180-day forward rate of =...

## Question:

(a) Assume the following information:

Spot rate of £ = $1.60

180-day forward rate of £ = $1.59

180-day British interest rate = 4%

180-day U.S. interest rate = 3%

Based on this information, is covered interest arbitrage by U.S. investors feasible (assuming that U.S. investors use their own funds ($1 million))? Explain. (5 marks)

(b) Covered Interest Arbitrage in Both Directions. The one-year interest rate in New Zealand is 6 percent. The one-year U.S. interest rate is 10 percent. The spot rate of the New Zealand dollar (NZ$) is $0.50. The forward rate of the New Zealand dollar is $0.54. Is covered interest arbitrage feasible for U.S. investors? Is it feasible for New Zealand investors? In each case, explain why covered interest arbitrage is or is not feasible. (10 marks)

(c) Assume that annual interest rates in the United States are 4 percent, while interest rates in France are 6 percent.

(i) According to IRP, what should the forward rate premium or discount of the euro be?

(ii). If the euro’s spot rate is $1.10, what should the one-year forward rate of the euro be? (6 marks)

(d) The one-year risk-free interest rate in Mexico is 10%. The one-year risk-free rate in the U.S. is 2%. Assume that interest rate parity exists. The spot rate of the Mexican peso is $.14.

Based on the international Fisher effect, what is the expected change in the spot rate over the next year? (4 marks)

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