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1. Consider the following: -On the FOREX market, an American bank gives the following quotes EUR:USD= 1.2100-1.2150 USD:JPY= 189.50-190.00 -A French bank gives the following

1.Consider the following:

-On the FOREX market, an American bank gives the following quotes

EUR:USD= 1.2100-1.2150

USD:JPY= 189.50-190.00

-A French bank gives the following quote:

EUR:JPY = 229.00-230.50

-Is there an arbitrage opportunity?

-If yes, determine the profit.

2.Consider the following:

Spot rate = 1.6400 $/pound sterling

90 day Forward rate = 1.6236 $/pound sterling

U.S. risk free rate = 1.15%

UK risk free rate = 3.75%

a.Does IRP hold?

b.If not, show how much profit can be earned by covered interest arbitrage? Use $1,000,000 or 1,000,000.

3.Earlier this morning, the annual U.S. interest rate was 7 percent and Mexico's annual interest rate was 9 percent. The spot rate of the Mexican peso was $.17. The one-year forward rate of the peso was $.16. Assume that as covered interest arbitrage occurred this morning, the interest rates were not affected, and the spot rate was not affected, but the forward rate was affected, and consequently interest rate parity now exists. Explain which type of investor (Mexican or U.S.) engaged in covered interest arbitrage, whether they were buying or selling pesos forward, and how that affected the forward rate of the peso.

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