International Finance Chapter 7 Exercises Beal Bank S.401 S.404 Yardley Bank Bid price of New Zealand dollar Ask price of New Zealand dollar $.400 Given this information, is locational arbitrage possible? If so, explain the steps involved in locational arbitrage, and compute the profit from this arbitrage if you had $1,000,000 to use. What markct forces would occur to eliminate any further possibilities of locational arbitrage? 2. Deriving the Forward Rate. Assume that annual interest rates in the U.S, are 4 percent, while interest rates in France are 6 percent. a. According to IRP, what should the forward rate premium or discount of the euro be? b. If the euro's spot rate is $1.10, what should the one-year forward rate of the euro be? 3. Covered Interest Arbitrage. Assume the following information: Spot rate of Canadian dollar 90-day forward rate of Canadian dollar 90-day Canadian interest rate 90-day U.S. interest rate $.80 S.79 4% 2.5% Given this information, what would be the yield (percentage return) to a U.S. investor who used covered interest arbitrage? (Assume the investor invests $1,000,000.) What market forces would occur to eliminate any further possibilities of covered interest arbitrage? 4. Covered Interest Arbitrage. Assume the following information: Spot rate of Mexican peso 180-day forward rate of Mexican peso 180-day Mexican interest rate 180-day U.S. interest rate = s.100 -$.098 = 6% 5% Is covered interest arbitrage worthwhile for Mexican investors who have pesos to invest? 5. Covered Interest Arbitrage in Both Directions. The one-year interest rate in New Zealand is 6 percent. The one-year U.S. interest rate is 10 percent. The spot rate of the New Zealand dollar (NZS) is S.50. The forward rate of the New Zealand dollar is S.54. Is covered interest arbitrage feasible for U.S. investors? Is it feasible for New Zealand investors? In each case, explain why covered interest arbitrage is or is not feasible