User Account

All Pages

PPP-IRP-FOREIGN EXCHANGE PROBLEM SET

Assignment Help Business Economics
Reference no: EM132386340

PPP-IRP-FOREIGN EXCHANGE PROBLEM SET -

Text (Required): Daniels, J. P. and VanHoose, D. D. (2014). Global Economic Issues and Policies, 3rd edition. Routledge. ISBN: 978-0415710190.

Note - For any drawing use: SmoothDraw.

Question 1: The formula for interest parity is:

i_$ - i_fc = (F-E)/E

Or that the interest rate differential between two countries is equal to the foreign exchange premium or discount. We want to explore how this relationship can be used to exploit arbitrage opportunities? Before we explore this question in more detail, please tackle the following problem:

Say i_US = 15%

i_UK = 10%

The current spot rate is $2/L.

What is the implied forward rate? What if the value is different than this?

Question 2: The formula for absolute purchasing power parity sets the domestic price of a good (in $) equal to the spot exchange rate ($/FC) multiplied by the foreign price of a good (in FC). For example, if the exchange rate is $2/L and the foreign price of a t-shirt is L5, then what should the domestic price sell for? What if the value is different than this?

Question 3: Now, ignore the bid ask spread and assume that we can either buy or sell at one price. Also, suppose we are quoted to following exchange rates:

Frankfurt £/SF = 0.2

New York $/SF = 0.40

London $/£ = 1.90

How can astute trades profit from the distorted exchange rates? How much money would you make if you started with $1,900,000?

Verified Expert

he forward rate is $2.10/L as per interest rate parity and if the future sport rate is different from this rate results in either discount or premium regarding the value of US$. The domestic price of a t-shirt is $10 as per purchasing power parity and if there is different domestic price resulting in either lower or higher cost of the same due to inflation. The arbitrage facility provides the opportunity of making money $100,000 due to higher US$ inflows than the US$ outflows.

Reference no: EM132386340

Questions Cloud

What amount of bad debt expense will the company record : Bad debts are estimated to be 10% of outstanding receivables. What amount of bad debt expense will the company record?
What is the cost of capital : Give an example of a time when you and/or your company have used a similar process for decision making.
Which inventory flow assumption will result in the lowest : In a period of increasing prices, which inventory flow assumption will result in the lowest amount of income tax expense? The response paper should be in APA.
Required return on an investment in firm a : So if the current market conditions are such that the risk-free rate is 2%, the market risk premium is 10% and Firm A's Beta is 1.25
PPP-IRP-FOREIGN EXCHANGE PROBLEM SET : PPP-IRP-FOREIGN EXCHANGE PROBLEM SET - How can astute trades profit from the distorted exchange rates? How much money would you make
Find the investor holding period return : Find the investor's holding period return, given that this no-load fund now has a net asset value of $10.90.
Below are figures representing the number of stocks : Below are figures representing the number of stocks making new highs and new lows for each month over a six-month period:
What will kingbird total ending inventory balance be : When applying the lower of cost or market rule to each item, what will Kingbird total ending inventory balance be? Kingbird, Inc. sells six different products.
Why do multinational corporations use tax avoidance : Why do multinational corporations use tax avoidance strategies even when it might be immoral?

Reviews

Write a Review

Business Economics Questions & Answers

  Determine the after-tax net present worth of assets

The company uses an after-tax MARR rate of 12% and is in the 35% tax bracket. Determine the after-tax net present worth of this asset over the 5-year service pe

  Marginal principle-let bygones be bygones

In the section of the text headed “Marginal Principle: Let Bygones Be Bygones,” it is emphasized that a firm, in setting output and price according to MR = MC, will disregard fixed cost.

  Explain any externalities in consumption

List and explain any externalities in consumption that exists for kindergarten through 12th grade education. Use caution in your economic reasoning and Analysis, and take care in the use of graphical display.

  Because high production-changeover time and costs

Because high production-changeover time and costs, a director of manufacturing must convince management that a proposed manufacturing method reduces costs before the new method can be implemented. A research study will measure the cost of the new met..

  Commission on the price of a book

In 2013 and 2014, a federal judge ruled that Apple colluded with five major U.S. publishers to drive up the prices of e-books

  Calculate the excess reserve ratio

Calculate the excess reserve ratio if checkable deposits are $900 million, total reserves are equal to $200 million, and the required reserve ratio is 10%.

  Combination of monetary and fiscal policy

If policymakers want to reach full employment while maintaining balanced trade, what combination of monetary and fiscal policy should they use.

  An example of implicit cost

A kinked demand curve is most likely to occur when other firms. The difference between the price firms would be willing to accept for their goods and the price they actually receive is called. The marginal product refers to the impact of which unit o..

  Resulted in near term reduction in profits

Texas Instruments the early period of the industry decided to price its semiconductors below production costs the decision increased sales but resulted in near- term reduction in profits. Why did TI make the decision. What were the long term implicat..

  Affect short-run aggregate supply-affect aggregate demand

Suppose in the first quarter of the year, Real GDP was $400 billion; in the second quarter it was $398 billion; in the third quarter it was $399 billion; and in the fourth quarter it was $395 billion. Has there been a recession? Briefly explain how e..

  What is the current profit and loss situation

Billy purchased five May feeder cattle contracts on January 25th at $157.625 per hundredweight. May feeder cattle contracts are currently trading at $148.55 per hundredweight. A commission was charged of $25 per contract. What is the current profit/l..

  Determine the payment amount

Determine the payment amount and the total finance charge. (Answer: total finance charge = $47.2K)

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!

Submit Assignment

Academics

Major Subjects

Majors

Get In Touch

whatsapp: +1-415-670-9521

Phone: +1-415-670-9521

Email: [email protected]

TERMS & POLICIES

HELP & SUPPORT

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