Essay
Questions
56. Suppose that the U.S. dollar-pound sterling
spot exchange rate equals $1.60/£, while the 360-day forward rate is $1.64/£.
The yield on a one-year U.S. Treasury bill is 9% and on a one-year U.K.
Treasury bill the yield is 8%. Calculate the covered interest differential in
favor of London. On the basis of this result, which country would you
expect to face capital inflows and which to face capital outflows?
57. Consider the case of
a U.S. investor holding dollars and deciding whether to invest in
Japanese Treasury bills or in U.S. Treasury bills. Assume that the investor
wants to end up holding dollars. What THREE methods are available to this
investor to turn present dollars into future dollars? In your answer present an
equation that shows the return per dollar invested under each method. Which of
these methods is the riskiest and why?
58. Suppose that the
dollar-yen spot exchange rate is $0.05/¥ and the 90-day forward exchange rate
is $0.06/¥. Assuming that covered interest parity holds, are Japanese interest
rates higher or lower than U.S. interest rates? Explain why.
denominator, thus the U.S. interest rates must be higher
than Japan’s.
59. Assume that the three-month forward exchange rate is $2.00/£ and a speculator believes that the spot rate in
three months will be $2.05/£. How can this person speculate in the forward
market? Also assumethat the speculator is willing to take a
position of about $20 million or £10 million. How much will the speculator earn if he or she is correct?
60. The current spot
exchange rate is $1.14/Euro. The current 90-day forward exchange rate is
$1.11/Euro. How could a U.S firm, who must repay a 40 million Euro loan in 90
days, use a forward exchange contract to hedge its risk exposure?
61. What is the
empirical evidence on the holding of the covered and uncovered interest rate
parity? How is the evidence different after the relaxation of capital controls
in the early 1980s?
.
62. When would a
currency speculator buy a put option and when would it be worth exercising the
option? What are some advantages and disadvantages of currency options compared
to forward exchange contracts?
