Recently, digital currency, i.e., Litecoin, has become more popular because of its transparency, security, and irreversibility....

 

 

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Recently, digital currency, i.e., Litecoin, has become more popular because of its transparency, security, and irreversibility. Litecoin is a peer-to-peer (P2P) internet currency that enables instant, near-zero cost payments to anyone in the world. Litecoin is an open source, global payment network that is fully decentralized without any central authorities. Different from the Bitcoin blockchain, one of the most popular digital currencies, the Litecoin blockchain is capable of handling higher transaction volumes so that merchants obtain faster confirmation times. Since it is quite young compared with Bitcoin, Litecoin still offers miners 12.5 new litecoins per block. However, the total Litecoin supply is still limited (approximately 84 million litecoins in total), but it is still 4 times more than Bitcoin. Below are monthly exchange rate data from 1/8/2020 to 1/7/2021. USD/LTC stands for price in USD per Litecoin, and AUD/LTC stands for price in AUD per Litecoin. Open High Volume (Billion) 15.90 81.10 89.00 97.40 69.14 58.66 77.78 28.71 35.42 1/07/2022 77.85 1/06/2022 95.25 1/05/2022 136.08 147.18 80.38 95.24 1/04/2022 165.15 172.63 135.77 136.08 28.97 1/03/2022 156.32 178.25 132.74 165.13 33.80 1/02/2022 155.05 200.18 129.01 156.32 35.65 1/01/2022 201.72 212.29 138.52 155.05 43.86 1/12/2021 291.42 304.07 188.70 201.69 59.35 1/11/2021 255.45 400.07 250.98 291.95 114.34 1/10/2021 212.05 284.46 209.95 255.14 115.37 1/09/2021 234.31 316.64 193.49 211.85 136.45 1/08/2021 196.72 266.75 183.33 234.57 87.63 1/07/2021 192.26 199.56 142.42 197.30 60.96 Date Low AUD/LTC Data are extracted from Yahoo Finance. Close Open High Low USD/LTC Close 53.70 61.46 46.66 56.18 68.42 70.08 40.68 53.65 96.17 106.80 55.32 68.41 123.73 129.31 95.95 96.17 113.48 133.91 97.24 123.72 109.59 143.23 92.61 113.47 146.54 153.14 98.67 109.59 207.64 217.51 132.05 146.51 192.05 294.56 184.11 208.01 153.29 214.02 151.59 191.82 171.47 233.06 140.15 153.15 144.51 191.38 135.99 144.14 147.84 104.33 171.66 144.93 Volume (Billion) 10.85 20.12 24.88 21.32 24.98 25.53 31.48 42.34 83.53 85.28 100.05 63.98 45.27 On 1/2/2022, one Litecoin dealer quoted a one-year LTC forward rate of USD 117/LTC., an LTC dealer quoted an interest rate of borrowing LTC of 1% p.a., and a U.S. bank quoted interest rate of borrowing USD is 4% p.a. Does the implied interest rate parity hold? If we were a U.S. investor who owns USD 1,000,000 ONLY, how much net profit can be generated from arbitrage? (Assuming there is no transaction cost or tax. No borrowing is allowed) Recently, digital currency, i.e., Litecoin, has become more popular because of its transparency, security, and irreversibility. Litecoin is a peer-to-peer (P2P) internet currency that enables instant, near-zero cost payments to anyone in the world. Litecoin is an open source, global payment network that is fully decentralized without any central authorities. Different from the Bitcoin blockchain, one of the most popular digital currencies, the Litecoin blockchain is capable of handling higher transaction volumes so that merchants obtain faster confirmation times. Since it is quite young compared with Bitcoin, Litecoin still offers miners 12.5 new litecoins per block. However, the total Litecoin supply is still limited (approximately 84 million litecoins in total), but it is still 4 times more than Bitcoin. Below are monthly exchange rate data from 1/8/2020 to 1/7/2021. USD/LTC stands for price in USD per Litecoin, and AUD/LTC stands for price in AUD per Litecoin. Open High Volume (Billion) 15.90 81.10 89.00 97.40 69.14 58.66 77.78 28.71 35.42 1/07/2022 77.85 1/06/2022 95.25 1/05/2022 136.08 147.18 80.38 95.24 1/04/2022 165.15 172.63 135.77 136.08 28.97 1/03/2022 156.32 178.25 132.74 165.13 33.80 1/02/2022 155.05 200.18 129.01 156.32 35.65 1/01/2022 201.72 212.29 138.52 155.05 43.86 1/12/2021 291.42 304.07 188.70 201.69 59.35 1/11/2021 255.45 400.07 250.98 291.95 114.34 1/10/2021 212.05 284.46 209.95 255.14 115.37 1/09/2021 234.31 316.64 193.49 211.85 136.45 1/08/2021 196.72 266.75 183.33 234.57 87.63 1/07/2021 192.26 199.56 142.42 197.30 60.96 Date Low AUD/LTC Data are extracted from Yahoo Finance. Close Open High Low USD/LTC Close 53.70 61.46 46.66 56.18 68.42 70.08 40.68 53.65 96.17 106.80 55.32 68.41 123.73 129.31 95.95 96.17 113.48 133.91 97.24 123.72 109.59 143.23 92.61 113.47 146.54 153.14 98.67 109.59 207.64 217.51 132.05 146.51 192.05 294.56 184.11 208.01 153.29 214.02 151.59 191.82 171.47 233.06 140.15 153.15 144.51 191.38 135.99 144.14 147.84 104.33 171.66 144.93 Volume (Billion) 10.85 20.12 24.88 21.32 24.98 25.53 31.48 42.34 83.53 85.28 100.05 63.98 45.27 On 1/2/2022, one Litecoin dealer quoted a one-year LTC forward rate of USD 117/LTC., an LTC dealer quoted an interest rate of borrowing LTC of 1% p.a., and a U.S. bank quoted interest rate of borrowing USD is 4% p.a. Does the implied interest rate parity hold? If we were a U.S. investor who owns USD 1,000,000 ONLY, how much net profit can be generated from arbitrage? (Assuming there is no transaction cost or tax. No borrowing is allowed)

Answer rating: 100% (QA)

Based on the information provided 1 Interest rate parity holds if the expected change in the exchang... View the full answer