class example_sols.docx - An investor is considering...

This preview shows 1 out of 2 pages.

An investor is considering investments in the UK & US. The investor sees that: Today’s spot $/GBP = $1.3918/GBP 1-year forward $/GBP = $1.4200/GBP US inflation expected to be: 2.5% UK inflation expected to be: 2.0% Current 1-year US interest rate = 1.98% Current 1-year UK interest rate = 0.58% Given this data, the investor wonders: 1) What does Relative PPP predict will be the 1-year change in the $/GBP exchange rate? The exchange rate in 1 year? [S($/GBP) t+1 – S($/GBP) t ]/S($/GBP) t = (.025 - .02)/1.02 = .0049 or 0.49% (exact) = .025 - .02 = .005 or .5% (inexact) S($/GBP) t+1 = S($/GBP) t ] + (S($/GBP) t )* [ (.025 - .02)/1.02 ] = 1.3910 + 1.3910*[ (.025 - .02)/1.02 ] = $1.3978/GBP 2) What does the IFE predict will be the 1-year change in the $/GBP exchange rate? = (.0198 - .0058)/(1.0058) = 0.0139, or 1.39% 3) When could the investor expect to profit from a carry trade between the US & the UK (i.e. what must be the % change in the GBP/$ or $/GBP for a profit to arise)? A carry trade would involve borrowing from the UK and investing in the US
Image of page 1

Subscribe to view the full document.

Image of page 2
You've reached the end of this preview.
  • Fall '08
  • STAFF
  • Finance, Money Market Hedge, UK investment worth

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern