Question
7. You observe the following spot exchange rates, one-year forward exchange rates, and one-year interest rates. Spot Exchange Rate One Year Forward Rate One Year
7. You observe the following spot exchange rates, one-year forward exchange rates, and one-year interest rates.
Spot Exchange Rate | One Year Forward Rate | One Year Intrest Rate | ||
UK Pound | 1.45 USD per GBP | 1.51 USD per GBP | 1.5% | |
Mexican peso | 17.5 MXN per USD | 20.0 MXN per USD | 9% | |
United States | 2% |
a. Calculate the forward premium for the GBP and the MXN versus the USD, and state whether each is trading at a forward premium or discount. (Note. For consistency, translate the MXN into a direct quote before calculating the forward premium.)
b. Please describe two arbitrage transactions, one for the MXN and one for the GBP, that would provide riskless profits. If no such transaction exists, please say so.
c. Please calculate the one-year forward rates for the GBP and MXN that are consistent with covered interest parity.
d. You observe the following spot exchange rates, 6-month forward exchange rates, and 6-month interest rates.
Spot Exchange Rate | 6 Month Forward Rate | 6 Month Intrest Rate | |
UK Pound | 1.45 USD per GBP | 1.50 USD per GBP | 1.5% |
United States | 2% | ||
Please calculate the 6-month forward rate that is consistent with covered interest parity. |
Please calculate the 6-month forward rate that is consistent with covered interest parity.
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