1) Suppose the interest rate on 12-month treasury bills is 6 percent in the United Kingdom....

Transcribed Image Text:

1) Suppose the interest rate on 12-month treasury bills is 6 percent in the United Kingdom. The current exchange rate is 2.00 S/pound and the 12 month forward exchange rate is 2.10 S/pound. a) If you (a U.S. resident) invested $10,000 in U.K. treasury bills, how many $'s would you have at the end of the year? 10,006 2 5,000 b) Assume covered interest rate parity holds. If you had invested that same $10,000 in U.S. treasury bills, how many $'s would you have at the end of the year? 10,000 2.10 4,000 2) Suppose the interest rate on 12-month treasury bills is 4 percent per year in the United States, today's spot exchange rate is 9.8 peso/S and the one-year forward rate is 10.2 peso/$. a) If covered interest rate parity holds, what must the (riskless) interest rate be in Mexico? b) If both covered and uncovered interest rate parity hold, what is the expected future spot- rate of peso/$ one year from now? 3) Assume that both covered and uncovered interest parity holds between the Japanese yen and the U.S. dollar. The current one year forward rate is 100 yen/S. The interest rates in both countries are 10%. a) What is the current spot rate (yen/S)? b) If the Japanese interest rate falls to 5%, what will be the new spot rate if U.S. interest rates and the market expectation of the future spot rate stays the same? Has the Japanese yen appreciated or depreciated as a result of this fall in the interest rate? 1) Suppose the interest rate on 12-month treasury bills is 6 percent in the United Kingdom. The current exchange rate is 2.00 S/pound and the 12 month forward exchange rate is 2.10 S/pound. a) If you (a U.S. resident) invested $10,000 in U.K. treasury bills, how many $'s would you have at the end of the year? 10,006 2 5,000 b) Assume covered interest rate parity holds. If you had invested that same $10,000 in U.S. treasury bills, how many $'s would you have at the end of the year? 10,000 2.10 4,000 2) Suppose the interest rate on 12-month treasury bills is 4 percent per year in the United States, today's spot exchange rate is 9.8 peso/S and the one-year forward rate is 10.2 peso/$. a) If covered interest rate parity holds, what must the (riskless) interest rate be in Mexico? b) If both covered and uncovered interest rate parity hold, what is the expected future spot- rate of peso/$ one year from now? 3) Assume that both covered and uncovered interest parity holds between the Japanese yen and the U.S. dollar. The current one year forward rate is 100 yen/S. The interest rates in both countries are 10%. a) What is the current spot rate (yen/S)? b) If the Japanese interest rate falls to 5%, what will be the new spot rate if U.S. interest rates and the market expectation of the future spot rate stays the same? Has the Japanese yen appreciated or depreciated as a result of this fall in the interest rate?