3 - from the purchase of foreign three-month treasury bills...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
7. The importer would have to purchase forward f.10,000 pounds for delivery in three months at today's FR=$1.96/f.1. After three months (and regardless ofwhat the spot rate is at that time), the importer would pay $19,600 and obtain the f.10,000 he needs to make the payment. 8. The exporter woiýId have to selI forward f.10,000 pounds for delivery in three months at today's FR=$1.96/f.1. After three months, the exporter will deliver the f.10,000 and receive $19,600. 9. The speculator can speculate in the forward exchange market by purchasing pounds forward for delivery in three months at FR=$2/f.1. If the specu1ator is coITect, he will eam Sc per pound purchased. ýo. The speculator can speculate in the forward exchange market by selýing pounds forward. If the speculator is right, he will eam 5c per pound transferred. If, on the other hand, SR=$2.05/f.1, the speculator willlose 5c per pound. ll. The interest arbitrageur will eam 2% per year
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

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....
View Full Document

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.

Ask a homework question - tutors are online