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businessfinancefinance questions and answerssuppose that the current spot exchange rate is €1.50/₤ and the one-year forward exchange rate is €1.60/₤. the one-year interest rate is 5.4% in euros and 5.2% in pounds. you can borrow at most €1,000,000 or the equivalent pound amount, i.e., ₤666,667, at the current spot exchange rate. assume that you are a euro-based investor. show how you can realize a
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Question: Suppose That The Current Spot Exchange Rate Is €1.50/₤ And The One-Year Forward Exchange Rate Is €1.60/₤. The One-Year Interest Rate Is 5.4% In Euros And 5.2% In Pounds. You Can Borrow At Most €1,000,000 Or The Equivalent Pound Amount, I.E., ₤666,667, At The Current Spot Exchange Rate. Assume That You Are A Euro-Based Investor. Show How You Can Realize A
Suppose that the current spot exchange rate is €1.50/₤ and the one-year forward exchange rate is €1.60/₤. The one-year interest rate is 5.4% in euros and 5.2% in pounds. You can borrow at most €1,000,000 or the equivalent pound amount, i.e., ₤666,667, at the current spot exchange rate.
Assume that you are a euro-based investor. Show how you can realize a guaranteed profit from covered interest arbitrage and determine the size of the arbitrage profit by answering the following questions:
How the interest rate parity may be restored as a result of the above arbitrage transactions?
Answer with either rise or fall.
a. Euro interest rate will=_____
b. Pound interest rate will =______
c. Spot exchange rate (euros per pound) will=______
d. Forward rate will=______