How a us investor profit from uncovered interest arbitrage

Assignment Help Macroeconomics
Reference no: EM131899981

Problem

1. Suppose the spot rate of the pound today is $1.70 and the 3-month forward rate is $1.75.

a. How can a U.S. importer who has to pay 20,000 pounds in 3 months hedge her foreign-exchange risk?

b. What occurs if the U.S. importer does not hedge and the spot rate of the pound in 3 months is $1.80?

2. Suppose the interest rate (on an annual basis) on 3-month Treasury bills is 10 percent in London and 6 percent in New York, and the spot rate of the pound is $2.

a. How can a U.S. investor profit from uncovered interest arbitrage?

b. If the price of the 3-month forward pound is $1.99, will a U.S. investor benefit from covered interest arbitrage? If so, by how much?

Reference no: EM131899981

Questions Cloud

Company underestimates costs or overestimates benefits : what do you think that the source of the mistake is likely to be? Is it that the company underestimates the costs, or overestimates the benefits,
How serving community and environment help business grow : "We are committed to putting the community at the heart of what we do". What is meant by this statement? How does serving the community and environment help.
What are some examples of international commodity agreements : What are some examples of international commodity agreements? Why have many of them broken down over time?
What is a project charter : What is a project charter? What forms can a project charter take?
How a us investor profit from uncovered interest arbitrage : How can a U.S. investor profit from uncovered interest arbitrage? Suppose the spot rate of the pound today is $1.70 and the 3-month forward rate is $1.75.
Calculate mean and standard deviation of the distribution : Calculate the mean and standard deviation of the distribution. Determine the 99% confidence interval.
Define and characterize mission statements : Define and characterize mission statements. What roles do mission statements play for a project?
Three-step binomial tree to estimate the option value : use a three-step binomial tree to estimate the option value. Compare the new price and delta with those obtained in part a. Which can you conclude?
What is the strategy of speculating in the forward market : What is the strategy of speculating in the forward market? In what other ways can one speculate on exchange-rate changes?

Reviews

Write a Review

Macroeconomics Questions & Answers

  Find garfieldís optimal choice of lasagna

The price of Canadian-grown peaches skyrockets during an unusually cold summer that reduces the size of the peach harvest and Technological improvements in the microchip lead to price reductions for personal computers and an increase in computer sale..

  Draw an arbitrary budget constraint for a person

Draw an arbitrary budget constraint for a person assuming that he or she receives no workers' compensation - Analyze the difference in the labor supply incentive effects of these two programs.

  Raising and lowering short-term interest rates

By Raising and lowering short-term interest rates to keep inflation moving at a steady pace, many central bankers and academics thought they had finally found a monetary policy solution to conquer the booms and busts of the business cycle.

  Product as ameasure of economic performance

What are some of the limitations using gross national product as ameasure of economic performance?

  Computing effect on firm optimal output

Making dresses is a labour-intensive process. Indeed, the production function of a dress-making firm is well described by the equation Q = L - L 2 /800, where Q denotes the number of dresses per week and L is the number of labour-hours per week.

  Write a book review on kaisha the japanese corporation

Write a book review on Kaisha, the Japanese Corporation by James C. Abegglen and George Stalk Jr. 1986 Basic Books, New York.

  Expect the pacific oceanto

The CCD (Carbonate Composition Depth) is the water depth atwhich the rate of supply of calcium carbonates from the surface isequal to the rate of dissolution. Do you expect the Pacific Oceanto have a shallower or deeper CCD than the Atlantic Ocean..

  Growth rate of the economy in the future

Economists generally agree that high budget deficits today will reduce the growth rate of the economy in the future

  What are sam explicit costs

At the end of one year, Sam was offered $300 for his business and all its equipment. What are Sam's explicit costs? Implicit cost? and economic profit in the first year?

  How much will the aggregate demand at current prices

Suppose the consumtion function is ( C = $500 billion + 0.9Y) and the government wants to stimulate the economy. By how much will the aggregate demand at current prices shift intially (before multiplier effects) with (a) A 50 billion dollar increa..

  Why almost all public needs met through the market mechanism

How can the market "fail" If indeed it can, outline the ways the government can either reduce or eliminate such possibilities. Then why are some politicians or heads of government want almost all public needs met through the market mechanism

  Liquidity of government bonds

In the 2010, the U.S. government ran a budget deficit. It issued a large quantity of bonds. How would this program affect the bond market price, yield, and quantity of bonds? How might it affect the liquidity of government bonds?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd