Equilibrium in currency market at interest rate differential

Assignment Help Financial Management

Reference no: EM131177487

1. Suppose that annualized interest rates on 3-month CD’s in the U.S. are .375% while in the Australia annualized interest rates on 3 month deposits are 1.10%

a) What must currency traders expect to happen to the exchange rate of the US $ in terms of the amount of Australian $ it buys over the next three months if there is equilibrium in the currency markets at this interest rate differential? You may assume that currently 1AUS $ is worth 75 US cents.

b) In currency markets the “carry trade” refers to borrowing in a currency with low short term interest rates, exchanging that currency for one with higher yielding short term financial instruments and investing in those higher yielding instruments. Why is this considered to be a “risky” trade?

Reference no: EM131177487

Questions Cloud

Operating profit firm can expect to earn from ad campaign : Bangers, Inc. is a start-up manufacturer of australian style frozen veggie pies located in San Antonio, Texas. The company is five years old and recently installed the manufacturing capabity to quadruple its unit sales. If Banger's operating profits ..

Compute the cost of capital for the firm : Compute the cost of capital for the firm for the following: currently bonds with a similar credit rating and maturity as the firm's oustanding debt are selling to yield 8.35 percent while the borrowing firm's corporate tax rate is 34 percent.

Preferred stock resembles bond because : Preferred stock resembles a bond because:

The total annual returns for a given period of time : Consider the following table for the total annual returns for a given period of time. Series Average return Standard Deviation Large-company stocks 11.7 % 20.6 % Small-company stocks 16.4 33.0 Long-term corporate bonds 5.8 8.9 Long-term government bo..

Equilibrium in currency market at interest rate differential : Suppose that annualized interest rates on 3-month CD’s in the U.S. are .375% while in the Australia annualized interest rates on 3 month deposits are 1.10%. What must currency traders expect to happen to the exchange rate of the US $ in terms of the ..

Estimate the yield for this investment : Assume that an investor generates the following income stream and can be purchased at the beginning of 209 for $1000 and sold at the end of 2015 for $1200. Estimate the yield for this investment. If a minimum return of 9% is required, would you recom..

Reported earnings available to common stock : Edna Reporting Studios Inc, reported earnings available to common stock of $4,200,000 last year. From those earnings, the company paid dividends of $1.29 on each of each $1,000,000 common shares outstanding. If the market price of the common stock is..

Calculate the modified duration of the bond : Consider a bond with annual coupon rate = 7%, yield to maturity = 5%, time to maturity = 3 years, and face value = $200. Coupons are paid semiannually. Calculate the price of the bond. Calculate the modified duration of the bond. Calculate the convex..

What is the market rate of return on this stock : The common stock of Eddie's Engines, Inc. sells for $37.13 a share. The stock is expected to pay $3.10 per share next year. Eddie's has established a pattern of increasing their dividends by 5.2 percent annually and expects to continue doing so. What..

User Account

All Pages