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Questions from Chapter 7

Q-2 Answer :

Yes because one could purchase new zealand dollars at yardley Bank for $.40 and sell them to Beal Bank for $.401. With $1 million available, 2.5 million New Zealand dollars could be purchased at Yardley Bank. These New Zealand dollars could then be sold to Beal Bank for $1,002,500, thereby gener ating a profit of $2,500. The large demand for New Zealand dollars at Yardley Bank will force this bank's ask price on New Zealand dollar to increase. The large sales of New Zealand dollars to Beal Bank will force its bid price down. Once the ask price of Yardley Bank is no longer less than the bid price of Beal Bank, locational arbitrage will no longer be beneficial.

Q-4 Answer;

$1,000,000/$.90 = C$1,111,111 × 3.02 = NZ$3,355,556 × $.30 = $1,006,667

The value of the canadian dollar with respect to the U.S. dollar would rise. The value of the Canadian dollar with respect to the New Zealand dollar would decline. The value of the New zealand dollar with respect to the U.S. dollar would fall.

Q-7 Answer;

MXP1,000,000 × $.100 = $100,000 × 1.05 = $105,000/$.098 = MXP1,071,429

Mexican investors would generate a yield of about 7.1% MXP1,071,429 – MXP1,000,000/MXP1,000,000), which exceeds their domestic yield. Thus, it is worthwhile for them.

Q-31 Answer;

1.07/1.11 – 1 = -3.60%. So the one-year forward rate is $.60 x 1 + -.036= $.5784. You will need 10,000,000 x $.5784 = $5,784,000.

Q-33 Answer;

$100,000 x 0.90 = 90,000
90,000/0.68 = C$132,353
C$132,353 x $.70 = $92,647

Profit = $92,647 - $100,000 = -$7,353 loss..

Questions from Chapter 8

Q-8 Answer ;

Interest rate parity can be evaluated using data at any one point in time to determine the relationship between the interest rate differential of two countries and the forward premium. PPP suggests a relationship between the inflation differential of two countries and the percentage change in the spot

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