What would you expect the 6-month forward rate to be

Assignment Help Financial Management

Reference no: EM131907259

1. Suppose an investor invests in a savings account in England one year ago.At the time of investment, the investor converted $100,000 to pounds at an exchange rate of 1.404$/£.

Assume the interest rate in England was 3% and today the investor is converting his/her savings balance (principal plus interest) to dollars when the exchange rate is 1.464$/£. Assume that today the exchange rate is 1.464$/£ and that the 6-month interest rate in London is 3.2% p.a. while the 6-month interest rate in the U.S. is 2.8% p.a.

What would you expect the 6-month forward rate to be at this time?

Remember to adjust for the 6-month period. Show your work

3. Again, working with interest rate parity, Let's assume that the spot exchange rate between Mexican pesos (P) and the U.S. dollar is 18.8679 P/$ and the 1-year forward rate is 19.1679 P/$.Also assume that the U.S. interest rates are 2% p.a. and the Mexican interest rates are 1.95% p.a.

What actions can an arbitrageur take to profit per $1000 invested from this scenario?

Specifically note the actions the arbitrageur would take and then report the arbitrage profit available per $1000 because interest rate parity is not holding.

Note that an arbitrageur would invest as much money as available (millions) given this scenario so huge arbitrage profits could be made.

Reference no: EM131907259

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