How you would realize certain profits in us dollar terms

Reference no: EM133251861

Questions -

Q1. Currently, the spot exchange rate is $0.85/A$, and the one-year forward exchange rate is $0.81/A$. One-year interest is 3.5% in the United States and 4.2% in Australia. You may borrow up to $1,000,000 or A$1,176,471, which is equivalent to $1,000,000 at the current spot rate.

a. Determine if Interest Rate Parity (IRP) is holding between Australia and the United States.

b. If IRP is not holding, explain in detail how you would realize certain profits in U.S. dollar terms.

c. Explain how IRP will be restored because of arbitrage transactions you carry out above.

Q2. Relative PPP: Suppose that the rate of inflation in Japan is 3% in 2017. If the inflation rate in France is 4% during 2017, how much would the yen strengthen relative to the euro if relative PPP is satisfied during 2017? (Round to four digits).

Q3. Estimating Depreciation Due to PPP: Assume that the spot exchange rate of the British pound is $1.73. How will this spot rate adjust according to PPP if the United Kingdom experiences an inflation rate of 7 percent while the United States experiences an inflation rate of 2 percent?

Reference no: EM133251861

Questions Cloud

How much must you set aside each year : If the interest rate is 3%, how much must you set aside each year to make sure that you will have $3,000,000 in the account on your 65th birthday

What is the lowest level of risk-aversion : A pension scheme offers investors two possible funds to invest in: a cash fund and a balanced fund. What is the lowest level of risk-aversion

What is the average change in her portfolio : Amy invested in three companies: 1700 dollars for Apple, 2200 dollars for Google and 1100 dollars for Starbucks. What is the average change in her portfolio

Calculate the no-arbitrage price of a forward contract : Suppose that you are a U.S.-based importer of goods from the United Kingdom. Calculate the no-arbitrage price of a forward contract

How you would realize certain profits in us dollar terms : Currently, the spot exchange rate is $0.85/A$, and the one-year forward exchange rate is $0.81/A$. How you would realize certain profits in US dollar terms

How many units does the firm need to sell : How many units does the firm need to sell to reach the cash break-even point? Note: Round your answer to the nearest whole number

Discuss the historical returns of a particular asset class : Question - Discuss the historical returns of a particular asset class, and analyze the risks and returns inherent in the asset class that you are writing about

What is best estimate of the stock current market value : The required return on this low-risk stock is 9.00%. What is the best estimate of the stock's current market value? Do not round intermediate calculations

What is the intrinsic value of the amansan co ltd stock : The estimated cost of capital is 5%. What is the intrinsic value of the Amansan Co. Ltd's stock? Is the stock overvalued or undervalued

User Account

All Pages