Question
As an employee of the foreign exchange department for a large corporation, you have been given the following information: Beginning of Year Spot rate of
As an employee of the foreign exchange department for a large corporation, you have been given the following information: Beginning of Year Spot rate of British = $1.596 Spot rate of Australian dollar (A$) = $.70 Cross exchange rate: 1 = A$2.28 One-year forward rate of A$ = $.71 One-year forward rate of = $1.58004 One-year U.S. interest rate = 8.00% One-year British interest rate = 9.09% One-year Australian interest rate = 7.00% a. Determine whether triangular arbitrage is feasible, and if so, how it should be conducted to make a profit? b. Determine whether covered interest arbitrage is feasible and, if so, how it should be conducted to make a profit? c. Based on the information for the beginning of the year, use the international Fisher effect (IFE) theory to forecast the annual percentage change in the British pounds value over the year. d. Assume that at the beginning of the year, the pounds value is in equilibrium. Assume that over the year the British inflation rate is 6 percent whereas the U.S. inflation rate is 4
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