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# International exchange problem

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1.) One year zero coupon US selling \$950.57 and UK938.97, both face value 1000 (\$1,000 in US, 1,000 in UK). Spot ex rate is \$2.0609/bp and one year forward rate is \$2.0403/bp
a) Calculate one yr interest rates in US and U.K
b) Calculate & report 1 year forward discount (%) or premium (%) for BP
c) Interest rate parity holding? why or why not? use formula iUS=iUK+/-%BP
d) How can you make arbitrage profits with 1m us or 1m uk
e) Show calculation arbitrage trading and calculate arbitrage profits

2.) U.S BANK HAS \$120M of dollar dominated loans @8% and \$80m of dollar donominated deposit at 6% and \$40m of british pound denominated deposits 5.5%. current ex rate is \$2.00/bp. calculate banks net interest income in dollars under following assumptions.

a) Exchange rate stays same
b) Exchange rate \$2.18bp in one year
c) Exchange rate \$1.90 bp in one year

#### Solution Preview

1) one year zero coupon US selling \$950.57 and UK938.97, both face value 1000
( \$1,000 in US, 1,000 in UK). Spot ex rate is \$2.0609/bp and one year forward rate is \$2.0403/bp
a} calculate one yr interest rates in US and U.K
For US:
Market Value of zero coupon Bond \$950.57
Face value of zero coupon rate \$1,000
Time to maturity 1 year
1 year Interest rate in US 5.20%

For UK:
Market Value of zero coupon Bond £938.97
Face value of zero coupon rate £1,000.00
Time to maturity 1 year
1 year Interest rate in US 6.50%

B}calculate & report 1 year forward discount (%) or premium (%) for BP
Spot ex rate \$2.0609 /bp
One year forward rate \$2.0403 /bp