Deriving the forward rate

Assignment Help Finance Basics

Reference no: EM1361644

1. Deriving the Forward Rate: Assume that annual interest rates in the U.S. are 4 percent, while interest rates in France are 6 percent.

a. According to IRP, what should the forward rate premium or discount of the euro be?

b. If the euro's spot rate is $1.10, what should the one-year forward rate of the euro be?

2. Covered Interest Arbitrage in Both Directions: The following information is available:

You have $500,000 to invest
The current spot rate of the Moroccan dirham is $.110.
The 60-day forward rate of the Moroccan dirham is $.108.
The 60-day interest rate in the U.S. is 1 percent.
The 60-day interest rate in Morocco is 2 percent.

a. What is the yield to a U.S. investor who conducts covered interest arbitrage? Did covered interest arbitrage work for the investor in this case?
b. Would covered interest arbitrage be possible for a Moroccan investor in this case?

3. Testing IRP: The one-year interest rate in Singapore is 11 percent. The one-year interest rate in the U.S. is 6 percent. The spot rate of the Singapore dollar (S$) is $.50 and the forward rate of the S$ is $.46. Assume zero transactions costs.

a. Does interest rate parity exist?

b. Can a U.S. firm benefit from investing funds in Singapore using covered interest arbitrage?

4. Deriving Forecasts of the Future Spot Rate. As of today, assume the following information is available:
U.S. Mexico
Real rate of interest required
by investors 2% 2%
Nominal interest rate 11% 15%
Spot rate ? $.20
One year forward rate ? $.19

a. Use the forward rate to forecast the percentage change in the Mexican peso over the next year.

b. Use the differential in expected inflation to forecast the percentage change in the Mexican peso over the next year.

c. Use the spot rate to forecast the percentage change in the Mexican peso over the next year.

5. Integrating IRP and IFE. Assume the following information is available for the U.S. and Europe:

U.S. Europe
Nominal interest rate 4% 6%
Expected inflation 2% 5%
Spot rate ----- $1.13
One-year forward rate ----- $1.10

a. Does IRP hold?
b. According to PPP, what is the expected spot rate of the euro in one year?
c. According to the IFE, what is the expected spot rate of the euro in one year?
d. Reconcile your answers to parts (a). and (c).

Reference no: EM1361644

Questions Cloud

Calculate and display total fees and discount : Write a program to select type of student using an option button and capture total credit hours using a text box. Calculate and display total fees, discount (if any) and net total fees (after discount).

Explain what ethical issues should be considered : Explain What ethical issues should be considered when marketing prescription drugs and What are the costs and benefits of marketing prescription drugs directly to physicians

Relationship between nutrition-obesity-fitness : How does the disease affect the body? What are the signs and symptoms that aid in detection of the disease? Does it have a retionship between NUTRITION, OBESITY AND FITNESS?

Explain how do we measure income inequality : Explain how do we measure income inequality. What problems arise the more unequal a country's income distribution becomes.

Deriving the forward rate : Suppose that annual interest rates in the U.S. are 4 percent, while interest rates in France are 6%. According to IRP, what should the forward rate premium or discount of the euro be.

Compare iso-iec outline with nist documents : Compare the ISO/IEC 27001 outline with the NIST documents outlined in 'Management of Information Security' (by Michael E. Whitman, Herbert J. Mattord).

Compute the price and quantity of equilibrium in country : Compute the price and quantity of equilibrium in each country when both country A and country B are closed economies.

Understanding of disease causation : What were the major "breakthroughs" that contributed to a more scientific understanding of disease causation?

Small business management on valentines day : Find a story of small business that is significantly impacted by Valentine's Day and find a story of small business located in Nebraska that is significantly impacted by Valentine's Day.

User Account

All Pages