What is the euro-denominated return

Reference no: EM131479794

Question: Consider a Dutch investor with 1,000 euros to place in a bank deposit in either the Netherlands or Great Britain. The (one-year) interest rate on bank deposits is 2% in Britain and 4.04% in the Netherlands. The (one-year) forward euro- pound exchange rate is 1.575 euros per pound and the spot rate is 1.5 euros per pound. Answer the following questions, using the exact equations for UIP and CIP as necessary.

a. What is the euro-denominated return on Dutch deposits for this investor?

b. What is the (riskless) euro-denominated return on British deposits for this investor using forward cover?

c. Is there an arbitrage opportunity here? Explain why or why not. Is this an equilibrium in the forward exchange rate market?

d. If the spot rate is 1.5 euros per pound, and interest rates are as stated previously, what is the equilibrium forward rate, according to covered interest parity (CIP)?

e. Suppose the forward rate takes the value given by your answer to (d). Compute the forward premium on the British pound for the Dutch investor (where exchange rates are in euros per pound). Is it positive or negative? Why do investors require this premium/discount in equilibrium?

f. If uncovered interest parity (UIP) holds, what is the expected depreciation of the euro (against the pound) over one year?

g. Based on your answer to (f), what is the expected euro-pound exchange rate one year ahead?

Reference no: EM131479794

Questions Cloud

Pre-project phase of typical project life cycle : As described by Warburton & Kanabar, what are the major activities in the Pre-Project Phase of a Typical Project Life Cycle?

What does effective global leadership achieve : What does effective global leadership achieve? different roles that managers on international assignment often assume to enhance leadership effectiveness

Explain the difference in exchange rates : Describe the different ways in which the government may intervene in the forex market. Why does the government have the ability to intervene in this way.

Prepare a minimum of eight pages : Prepare a minimum of eight pages, not counting the title page and reference(s) page, MS Word document using APA 6th Edition guidelines.

What is the euro-denominated return : Consider a Dutch investor with 1,000 euros to place in a bank deposit in either the Netherlands or Great Britain. The (one-year) interest rate on bank deposits.

Discuss the possible interpretations of non-verbal behavior : Discuss three possible interpretations of each non-verbal behavior and analyze how each interpretation would influence.

The importance of obtaining a college education : The topic for your persuasive speech is " The Importance of Obtaining a College Education"

How much does your firm expect to receive in us dollars : You are a financial adviser to a U.S. corporation that expects to receive a payment of 40 million Japanese yen in 180 days for goods exported to Japan.

Principles of lean operating systems : 1) "It takes awareness and leadership to see the necessary changes that will make it a better project for our future."

User Account

All Pages