Reference no: EM132641916
You observe as below: 90-day Interest rates are 3% per year in the US and 15% in Argentina. Spot exchange rate is 1USD = 100 ARS. 90-day Forward rate is 1USD = 104.20 ARS. Assume 360-days in a year. Answer the questions below. Explain logic in each step. Doing the math right will only get you 50% credit. You need to prove that you understand the concept and why you are doing something. Remember that by law all interest rates are quoted as APR (i.e. 3% is an annual rate.)
1. Based on IRP what should the forward rate be?
2. How can you benefit from this situation? Assume that you can either borrow 1 million USD or 100 million ARS. Explain each step.
1. Which currency will you borrow in and why?
2. Which currency will you exchange today and in the future?
3. What will you do to make sure that your position is hedged?
4. How much you will your benefit be in 90-days.
3. What will be the impact of your actions on USD/ARS spot exchange rate and USD/ARS forward rate?
4. If an individual were to borrow 1 million USD at 3% and invest it in Argentina for higher interest rate, it would be called ______________.
5. What assumption would the person in part d above be making?
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