Given the following data, what will an arbitrageur earn after one year on a covered interest arbitrage if he begins with $1 million?In New York today Interest rate = 7%In London today spot rate = $1.75/LInterest rate = 12%In London one year forward rate = $1.68/L
Answer(s): B
Begin by borrowing $1,000,000 at 7%, owing $1,070,000 at year end.Convert the $1,000,000 to pounds at $1.75/L = L571,428.57 and invest this in London at 12% yielding L640,000 at year end. At the same time, sell the L640,000 forward at a rate of $1.68/L for delivery in one year yielding $1,075,200 at year end. At the end of the year, collect the L640,000 and deliver to the bank's foreign exchange dept. in return for $1,075,200. Repay the $1,070,000 from the $1,075,200 leaving a profit of $5,200.
Which of the following is correct?
Answer(s): E
The volume of international trade, enhanced by improved transportation and communication has grown rapidly in recent years. Approximately 21 percent of the world's total output is now sold in a country other than that in which it was produced. This is double the figure of three decades ago.
If the one month FF/$ exchange rate is 8.0200-50 this implies:
In a forward, or futures, contract, a commitment is irrevocably made on the transaction date, but delivery takes place later, here a month later. The bid-ask quotation here implies that the bank is willing to commit itself today to buy dollars in one month for 8.0200 francs or to sell them for 8.0250 francs.
If the French franc moves from 8.00 to 7.10 francs to the dollar:
Answer(s): D
Since the U.S. dollar now purchases less French francs the U.S. dollar has depreciated; symmetrically, the French franc has appreciated. Each franc now buys .141 dollars whereas before each franc purchased .125 dollars.
The exchange rate of a country's currency will ________ if the income of the country and its trading partners rises.
Answer(s): C
Fore countries are similar in size and propensity to import, the country that is growing the fastest will increase its demand for imports relatively more than its trading partner, resulting in a decrease in the value of the more rapidly growing nation's currency. Sluggish growth of income relative to one's trading partners tends to cause the slow-growth nation's currency to appreciate.
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