Scribd Logo
Upload

Welcome to Scribd!

  • 911 views

    MSC Dar Parity Relationships Questions

    Uploaded by

    Moud Khalfani
    1) The document contains review questions on various international finance concepts including purchasing power parity, interest rate parity, Fisher effect, and the relationship between them. 2) Questions cover topics such as calculating future exchange rates given inflation rates, identifying arbitrage opportunities between interest rates and exchange rates in different countries, and estimating future spot rates using theories like PPP and interest rate parity. 3) Answers require applying concepts like covered interest arbitrage, Fisher effect, and PPP to scenarios involving exchange rates, interest rates, inflation rates, and forward rates between various currency pairs.

    Copyright:

    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd

    MSC Dar Parity Relationships Questions

    Uploaded by

    Moud Khalfani
    911 views5 pages
    1) The document contains review questions on various international finance concepts including purchasing power parity, interest rate parity, Fisher effect, and the relationship between them. 2) Questions cover topics such as calculating future exchange rates given inflation rates, identifying arbitrage opportunities between interest rates and exchange rates in different countries, and estimating future spot rates using theories like PPP and interest rate parity. 3) Answers require applying concepts like covered interest arbitrage, Fisher effect, and PPP to scenarios involving exchange rates, interest rates, inflation rates, and forward rates between various currency pairs.

    Original Title

    MSC DAR PARITY RELATIONSHIPS QUESTIONS

    Copyright

    © © All Rights Reserved

    Available Formats

    DOC, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    1) The document contains review questions on various international finance concepts including purchasing power parity, interest rate parity, Fisher effect, and the relationship between them. 2) Questions cover topics such as calculating future exchange rates given inflation rates, identifying arbitrage opportunities between interest rates and exchange rates in different countries, and estimating future spot rates using theories like PPP and interest rate parity. 3) Answers require applying concepts like covered interest arbitrage, Fisher effect, and PPP to scenarios involving exchange rates, interest rates, inflation rates, and forward rates between various currency pairs.

    Copyright:

    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    911 views5 pages

    MSC Dar Parity Relationships Questions

    Uploaded by

    Moud Khalfani
    1) The document contains review questions on various international finance concepts including purchasing power parity, interest rate parity, Fisher effect, and the relationship between them. 2) Questions cover topics such as calculating future exchange rates given inflation rates, identifying arbitrage opportunities between interest rates and exchange rates in different countries, and estimating future spot rates using theories like PPP and interest rate parity. 3) Answers require applying concepts like covered interest arbitrage, Fisher effect, and PPP to scenarios involving exchange rates, interest rates, inflation rates, and forward rates between various currency pairs.

    Copyright:

    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    of 5

    REVIEW QUESTIONS ON PARITY RELATIONSHIPS

    QUESTION ONE
    A: [THE LAW OF ONE PRICE]
    Two countries, Tanzania and Kenya produce only one good, wheat. Suppose the
    price of wheat in Tanzania is TZS325 and in Kenya is KES 135

     According to the law of one price, what should the TZS/KES spot
    exchange rate be?

     Suppose the price of wheat over the next year is expected to rise to
    TZS350 in Tanzania and KES 160 in Kenya. What should the one-year
    TZS/KES exchange rate be?

    B: [THE PURCHASING POWER PARITY: RELATIVE VESION]


    The Tanzania and Britain are running annual inflation rates of 20% and 2%
    respectively. The initial exchange rate is £1 = 2000/= Calculate the value of the
    £ in 2 year (Assume the PPP holds).

    C: [THE PPP: RELATIVE VERSION]


    The U.S Price level is at 112 while the German Price level is as 107 relative to the
    base price levels of 100. If the initial value of the DM (at price level of 100) was
    $ 0.48 calculate the dollar value of the DM according to the PPP.

    QUESTION TWO
    [THE INTEREST RATE PARITY]

    2A: [COVERED INTERES ARBITRACE]


    Suppose the interest rate on £ is 12% in London, and the interest rate on a
    comparable dollar investment in New York is 7%. The £ spot rate is $1.75 and
    the one year forward rate is $1.68. Are there opportunities for covered interest
    arbitrage? Illustrate the profits associated with covered interest arbitrage by
    showing the steps that an arbitrageur can take to profit from the discrepancy in
    rates based on $1,000,000 transaction. Assume that the borrowing and lending
    rates are identical and the bid-ask spread in the sport and forward market is
    zero.

    2B: [COVERED INTERES ARBITRAGE]


    Here are some prices in the international foreign exchange and money markets:
    Spot rate TZS 750/DM
    Forward Rate (one year) TZS 770/DN
    Interest Rate (DM) 7% per year

    1
    Interest Rate (TZS) 9% per year

    Assuming no transaction costs or tax exist do covered arbitrage profits exist in


    the above situation? Describe the flows.

    2C: [COVERED INTEREST ARBITRAGE]


    Are arbitrage gains possible from the following set of information to be
    arbitrageur?
    Spot Rate TZS47.88/SAR
    3 Month Forward Rate TZS48.28/SAR
    3 Month Interest rates: TZS 7% pa
    SAR 11% pa

    QUESTION THREE

    [FISHER EFFECT & THE INTERNATIONAL FISHER EFFECT]

    3A: [THE FISHER EFFECT]


    If expected inflation is 100% and the real required return is 5% what will the
    nominal – interest rate be according to the Fisher effect?

    3B: [THE INTERNATIONAL FISHER EFFECT]


    1. In July the one – year interest rate is 4% on Swill francs and 13% on
    US Dollars.

     If the current exchange rat is SFr1=$0.63 what is the expected


    future exchange rate in one year?

     If a change in expectations regarding future US inflation causes


    the expected future spot rate to rise to $0.70 what should
    happen to the U.S interest rate according to the International
    Fisher Effect?

    2. If the $:¥spot rate is $1=¥218 and interest rates in Tokyo and New
    York are 6% and 12% respectively, what will be the expected $: ¥
    exchange rate one year hence.

    QUESTION FOUR:
    [FORWARD RATES AS UNBIASED PREDICTORS OF FUTURE SPOT
    RATES] [FORECASTING FUTURE SPOT RATES]

    If the 90 day forward rate is EURO = $ 1.5987, what is the expected value of the
    EURO in 90 days (use the UFR to forecast the future $/EURO spot rate).

    2
    QUESTION FIVE
    INTERRELATIONSHIPS AMONG PARITIES]
    5A: [FISHER EFFECT AND INTEREST RATE PARITY]
    Suppose that in Japan the interest is 8% and inflation is expected to be 3%.
    Meanwhile the expected inflation rate in France is 12% and the English interest
    is 14%. To the nearest whole number, what is the best estimate of the one-year
    forward exchange premium (discount) at which the pound will be selling relative
    to the French franc?

    5B: [FISHER EFFCT AND THE PPP]


    Due to integrated nature of their capital markets, investors in both the United
    State and U.K. require the same real interest rate 2.5%, on their lending. There
    is a consensus in capital markets that the annual inflation rate is likely to be
    3.5% in the United State and 1.5 in the U.K. for the next three years. The spot
    exchange rate is currently $1.50/£.

    REQUIRED:

    (a) Compute the nominal interest rate per annum in both the Unites State
    and U.K., assuming that the Fisher Effect holds.

    (b) What is your expected future spot dollar- Pound exchange rate in
    three year from now?

    (c) Can you inter the forward dollar-pound exchange rate for one year
    maturity?

    QUESTION SIX

    6A:

    ‘If all securities markets are fully integrated, securities of comparable expected
    returns and risk should have the same required rate of return in each national
    market adjusting for foreign exchange risk and political risk. This applies to both
    equity and debt, although it often happen that one or the other may be more
    integrated than its counterpart.’

    REQUIRED:

    Based on this statement, critically explain what is your understanding of capital


    market segmentation is.

    3
    6B
    It is now the beginning of year 2016. The spot bid rate for the US Dollar is TZS
    1240 while the spot bid – ask spread is TZS 15. a forecaster provides the
    following forecasts for the bid ask spread and inflation rates for Tanzania and
    United States in the next four years.

    YEAR 2017 2018 2019 2020


    BID – ASK SPREAD [TZS] 23 27 30 45
    FORECAST RATE OF INFLATION
     TANZANIA 6% 5% 4% 3.5%
     UNITED STATES 3.5% 3% 3% 2.5%

    REQUIRED:

    On the basis of the bid ask spread forecasts and the theory of PPP determine
    the expected exchange rates and the percentage bid ask spread for the year
    2017- 2020.
    6C:
    Suppose annual inflation rates in the U.S. and Brazil are expected to be 5% and
    90% respectively over the next year. If the current spot rate for the Brazilian
    Cruzeiro is 3342.62 Cruzeiros per dollar, what is the best estimate of the
    Cruzeiro’s future spot rate one year from now?

    6D
    Define the Purchasing Power Parity Theory and discuss the problem it faces
    when applied in practice.
    6E Suppose the interest rate on £ is 15% in London, and the interest
    rate on a comparable Tanzanian shilling investment in Dar es Salaam is
    10%. The £ Spot rate is TZS 1,750 and the one – year forward rate is
    TZS 1,680.

    REQUIRED:

    1. Are there opportunities for covered interest arbitrage? Show relevant


    computations.

    2. Is there covered interest differential in favor of London or Dar es Salaam?

    3. Illustrate the profits associated with covered interest arbitrage by showing


    the steps that a Tanzanian arbitrageur can take to profit from the
    discrepancy in rates. Assume that the borrowing and lending rates are
    identical and the bid-ask spread in the spot and forward market is zero.

    4
    5

    You might also like