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    In-Class Discussion Examples

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    17davidk

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    © All Rights Reserved
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    In-Class Discussion Examples

    Uploaded by

    17davidk
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    In-class discussion examples

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    8 views2 pages

    In-Class Discussion Examples

    Uploaded by

    17davidk

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    In class discussion Q

    1. Investor is based in Europe and has €10,000 to invest for one year. Interest rate

    is 5% in the euro zone and say 15.5% in the U.K. and S (£/€) = 0.80. What

    alternatives do you have? Does the IRP hold?

    2. Annual inflation rate is 4.5% in the USA and 2% in the U.K. and pound

    appreciated against the dollar by 3.5%. Calculate q.

    3. Suppose that the treasurer of IBM has an extra cash reserve of $100,000,000 to

    invest for six months. The six-month interest rate is 8 percent per annum in the

    United States and 7 percent per annum in Germany. Currently, the spot

    exchange rate is €1.01 per dollar and the six-month forward exchange rate is

    €0.99 per dollar. The treasurer of IBM does not wish to bear any exchange risk.

    Where should he/she invest to maximize the return?

    4. Suppose that the current spot exchange rate is €0.80/$ and the three-month

    forward exchange rate is €0.7813/$. The three-month interest rate is 5.60

    percent per annum in the United States and 5.40 percent per annum in France.

    Assume that you can borrow up to $1,000,000 or €800,000. Show how to realize

    a certain profit. Also determine the size of your arbitrage dollar profit.
    In class discussion Q

    5. Let’s assume the interest rate per annum is 5.93% in the United States and

    70.0% in Sri Lanka. Based on the reported interest rates, how would you predict

    the change of the exchange rate between the U.S. dollar and the Sri Lankan

    rupee?

    6. Assume the USD/CAD spot exchange rate is 1.30 and the interest rates in the

    USA is 5% and 6% in Canada. According to the International Fisher effect

    calculate the expected future spot rate.

    7. Because of global integration, investors in the USA and the U.K. require the

    same real interest, 3.2 percent, on their lending. The market consensus annual

    inflation rate is likely to be 4.2% in the USA and 2.2% in the U.K. for the next

    three years. The spot exchange rate is currently $2.2/pound. Calculate the

    nominal interest rate per annum in both countries assuming Fisher effect holds.

    Also, what is your expected future spot dollar-pound exchange rate in three years

    from now?

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