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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

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    https://brainmass.com/business/foreign-exchange-rates/international-exchange-problem-464337

    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
    1 year forward discount for BP -1.00% Negative sign indicate discount

    C} Interest rate parity holding? why or why not? use formula ...

    Solution Summary

    This solution helps with a problem about international exchange.

    $2.19