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Suppose the annual interest rate is 3.5% in U.S. and 4.5% in U.K., and that the spot exchange rate is S($/£) = 1.3918 and the forward exchange rate with 12-month maturity is F12($/£) = 1.3526. Assume you are a U.S. trader and can borrow up to $1,000,000 (or £1,000,000). 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. Your arbitrage profit should be in U.S. dollar.
Assuming that the partnership actually pays those cash flows, what would be the net present value of this investment if the interest rate was 12.2%?
Decline, Inc. is trying to determine its cost of debt. The firm has a debt issue outstanding with 15 years to maturity that is quoted at 102.7 percent of face value. The issue makes semiannual payments and has an embedded cost of 9 percent annually. ..
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What mutual funds would you recommend for a 40 years old single man who is saving for his retirement? He hopes to retire at age 70.
You want to buy a new car, but you know that the most you can afford for payments is $ 375 per month. You want 48 month financing, and you can arrange such a loan at 6 percent compounded monthly. You have nothing to trade and no down payment. The mos..
What is the expected real rate of return for an investor who purchases the 1-year Treasury bill?
You are considering investing in an opportunity that will pay you $5000 3 years from now, and $8000 5 years from now.
Thomas Brothers is expected to pay a $2.3 per share dividend at the end of the year (that is, D1 = $2.3). The dividend is expected to grow at a constant rate of 3% a year. The required rate of return on the stock, rs, is 15%. What is the stock's curr..
An annuity of $1,000 per year has 10 annual cash flows, with the first one being today. At an interest rate of 15% annually, what is the annuity’s future value?
Farmers and businessmen in Bulgaria (EU) can lease equipment and pay for it over time instead of raising money up front to buy it,
Investments can be long-term or short-term. If you are investing for the long term, how much do you think general news stories, news about the economy, and company-specific news stories should affect your investment choices? Explain your answer in de..
Which of the following would be an example of a capital gain?
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