Unformatted text preview: from the purchase of foreign three-month treasury bills ifhe covers the foreign exchange risk. 12. a. if the foreign currency were instead at a forward premium of i percent per year, the interest arbitrageur would eam 5% per year. b. if the foreign currency was at a forward discount of 6 percent per year, it would pay for investors to transfer funds from the higher- to the lower-interest center and lose 4% interest but gain 6% from the foreign exchange transaction, for a net gain of 2% per year. 13. a. At point B, the loss of 1% per year from the forward premium on the foreign exchange transaction on the part of the foreign investor is more than made up by the 2% per year gain from the higher interest rate in our nation. At point B', the 1 % interest loss per year on arbitrage inflow into our nation is le ss than the 2% per year gain on the forward discount on currency transaction....
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This note was uploaded on 06/09/2008 for the course ECON int. econ taught by Professor Kazım during the Spring '08 term at Dokuz Eylül University.
- Spring '08