PS3 - $1.12 $1.13 Euro 1-year Forward $1.12 $1.13 Deposit...

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Problem Set 3 Econ S-1530 Due July 15, 2010 International Parity Conditions Problem 1: Triangular Arbitrage Using the quotations below, describe what kind of transactions you can enter into to exploit triangular arbitrage. If you have $10,000 to invest, what would be your profit? Discuss the process of re-alignment – what happens as this strategy is implemented? Bid Ask Value of a British Pound in USD $1.6 $1.61 Value of a Malaysian Ringgit in USD $0.2 $0.201 Value of a British Pound in MYR MYR8.1 MYR8.2 Problem 2: Interest Rate Parity The following exchange rates and 1-year interest rates exist: Bid Ask Euro Spot
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Unformatted text preview: $1.12 $1.13 Euro 1-year Forward $1.12 $1.13 Deposit Rate Loan Rate Interest rate on dollars 6.0% 9.0% Interest rate on euros 6.5% 9.5% You have $100,000 to invest for 1 year. Would you benefit from engaging in covered interest arbitrage? Problem 3: Purchasing power parity A US importer of Japanese computer components pays for the components in yen. The importer is not concerned about a possible increase in Japanese prices because of the likely offsetting effect caused by purchasing power parity. a) Explain what this means. b) Using what you know about tests of PPP, should the importer be worried or not?...
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This note was uploaded on 10/21/2010 for the course ECON 1530 taught by Professor Ohly during the Spring '10 term at Dartmouth.

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