Homework for International Finance Homework for International Finance

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VOZ_9

Business Finance

Southwestern Oklahoma State University

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1. While abroad, you purchased a French portrait for EUR 10,000, payable in 6 months’ time. You have sufficient funds in your domestic (US) bank to purchase the painting. The current spot rate is 1.2 USD/EUR and the 6 month Forward rate is 1.25 USD/EUR. Currently, annual interest rates are 3% in the US and 6% in France. Assume monthly compounding. Should you: a. Keep the funds in your domestic bank and purchase EUR10,000 Forward? b. Purchase Euros today and invest oversears until the funds are due? Justify your response. 2. Suppose that the one-year interest rate is 4.0 percent in Italy, the spot exchange rate is $1.60/€, and the one-year forward exchange rate is $1.58/€. What must the one-year interest rate be in the United States? 3. Suppose that the annual interest rate is 2.0 percent in the United States and 4 percent in Germany, and that the spot exchange rate is $1.60/€ and the forward exchange rate, with oneyear maturity, is $1.58/€. Assume that an arbitrager can borrow up to $1,000,000 or €625,000. If an astute trader finds an arbitrage, what is the net cash flow in one year? 4. As of today, the spot exchange rate is €1.00 = $1.25 and the rates of inflation expected to prevail for the next year in the U.S. is 2 percent and 3 percent in the euro zone. What is the oneyear forward rate that should prevail?
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Explanation & Answer:
4 Questions
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Running head: CHAPTER 6 HOMEWORK

Chapter 6 homework
Firstname Lastname
Name of Institution

1

CHAPTER 6 HOMEWORK

2

Question 1
Answer
𝐵𝑜𝑟𝑟𝑜𝑤𝑖𝑛𝑔 𝑖𝑛 𝑈𝑆 𝑖𝑠 𝑠𝑢𝑏𝑗𝑒𝑐𝑡𝑒𝑑 𝑡𝑜 3% 𝑡ℎ𝑢𝑠 ℎ𝑒 𝑤𝑖𝑙𝑙 𝑝𝑎𝑦 𝑏𝑎𝑐𝑘 𝑎 𝑡𝑜𝑡𝑎𝑙 𝑜𝑓
= 10000 ∗ 1.2 ∗ 1.036 = $14,328.63
𝑤ℎ𝑖𝑙𝑒 𝑓𝑜𝑟 𝑓𝑜𝑤𝑎𝑟𝑑 𝑟𝑎𝑡𝑒 𝑤𝑒 ℎ𝑎𝑣𝑒 = 10000 ∗ 1.25 ∗ 1.066 = $17731.49
The best option will be by purchasing the Euros today and invest overseas until the funds
are due. This is because from the justification above, it tis the cheapest way to go
Question 2
Solution
The solution is given by the following equation
𝐹=𝑠∗

1 + 𝑟...


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