Arbitrage opportunity according to the interest rate

Assignment Help Financial Management

Reference no: EM131989989

Suppose the annual interest rate is 3.5% in U.S. and 2.5% in euro, and that the spot exchange rate is S($/euro) = 1.2405 and the forward exchange rate with 12-month maturity is F12($/euro) = 1.2635. Assume you are a U.S. trader and can borrow up to $1,000,000 (or euro1,000,000). Answer the following questions.

a. Is there an arbitrage opportunity according to the Interest Rate Parity based on the above information? (show your work!)

b. Show the strategy to capture the arbitrage profit by setting up a transaction table. Listing the required transactions and cash flows (including cash flow signs and currency symbols). Your arbitrage profit should be in U.S. dollar.

Reference no: EM131989989

Questions Cloud

What lump sum do parents need to deposit in account earning : What lump sum do parents need to deposit in an account earning 15%, compounded monthly, so that it will grow to $60,000 for their son's college fund in 16 years

Additional financing will be required to support sale growth : How much additional financing will be required to support sales growth from $900,000 per year to $1,500,000 per year.

Arbitrage opportunity according to the interest rate parity : Is there an arbitrage opportunity according to the Interest Rate Parity based on the above information?

The fisher effect has all of the components : The Fisher Effect has all of the following components, except:

Arbitrage opportunity according to the interest rate : Is there an arbitrage opportunity according to the Interest Rate Parity based on the above information? (show your work!)

Future value equation related to present value equation : What is “discounting,” and how is it related to compounding? How is the future value equation related to the present value equation?

About the challenge of balancing the federal budget : Discuss at least two lessons you learned about the challenge of balancing the federal budget.

Exact relationship between rates of return and inflation : What is the rate of inflation? Use the exact relationship between rates of return and inflation.

Decide whether the problem relates to ordinary annuity : Decide whether the problem relates to an ordinary annuity or an annuity due, and Solve the problem.

User Account

All Pages