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Sem 6.docx - BF2207 International Finance International...

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BF2207 International FinanceInternational Arbitrage and Interest Rate ParityProblem Set 4Question 1.Forward Ratea.Assume that Mexico’s economy has expanded significantly, causing a high demand forloanable funds there by local firms. How might these conditions affect the forwarddiscount of the Mexican peso?.
b.Assume that the 30-day forward premium of the euro is –1 percent, while the 90-dayforward premium of the euro is 2 percent. Explain the likely interest rate conditions thatwould cause these premiums. Does this ensure that covered interest arbitrage isworthwhile?
c.If the U.S. interest rate is close to zero, while the interest rate of Russia was very high,what would interest rate parity suggest about the forward rate of the Russian ruble?
Question 2.Forward Premium and Discounta.Assume that interest rate parity holds. At the beginning of the month, the spot rate of theCanadian dollar is $0.70, while the one-year forward rate is $0.68. Assume that U.S.interest rates increase steadily over the month. At the end of the month, the one-yearforward rate is higher than it was at the beginning of the month. Yet, theone-yearforward discount is larger (the one-year premium is more negative) at the end of themonth than it was at the beginning of the month. Explain how the relationshipbetween the U.S. interest rate and the Canadian interest rate changed from the beginningof the month until the end of the month..
b.The interest rate in Indonesia is commonly higher than the interest rate in the U.S., whichreflects a higher expected rate of inflation there. Why should Nike consider hedging its

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Term
Spring
Professor
NoProfessor
Tags
Forward rate, United States dollar, Mexican interest rates

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