You, a foreign exchange trader for Green Valley Capital, are exploring covered interest arbitrage opportunities between Euros (C) and US Dollar ($) for the next 60 days.
You have ⬠1 million or $ 1.1 million at the current spot rate for the covered interest arbitrage and face the following quotes:
Arbitrage fund available
â¬1,000,000 or $1,100,000
Spot exchange rate
$1.1000/C
60-day forward rate
$1.1040/C
US Dollar annual interest rate
1.8% Euro annual interest rate
0.90%
1(A) What is the annual effective US Dollar interest rate from Euro investment?
1(B) Show the steps and calculate the amount of the covered interest arbitrage profit
1(C) Determine a theoretical 6o-day forward rate (round to 4 decimal places) that will result in a zero covered interest arbitrage profit.
1(D) The following appeared in the Feb. 4, 2016 Wall Street Journal article "Dollar Continues to Fall Ahead of Friday's Jobs Report":
Investors have been fleeing the dollar in recent days, amid expectation that the Federal Reserve won't be able to raise interest rates as much as expected this year due to soft growth in the U.S. and turbulent global markets. Such persistently low interest rates weigh on the U.S. currency, as they make the dollar less attractive to yield-seeking investors. The dollar has now fallen 2.6% against a basket of currencies in February.
Explain (not more than half of a page) the above narrative with the interest rate parity relationship
You, a foreign exchange trader for Green Valley Capital, are exploring covered interest arbitrage opportunities between Euros (C) and US Dollar ($) for the next 60 days.
You have ⬠1 million or $ 1.1 million at the current spot rate for the covered interest arbitrage and face the following quotes:
| Arbitrage fund available | â¬1,000,000 or $1,100,000 |
| Spot exchange rate | $1.1000/C |
| 60-day forward rate | $1.1040/C |
| US Dollar annual interest rate | 1.8% |
| Euro annual interest rate | 0.90% |
1(A) What is the annual effective US Dollar interest rate from Euro investment?
1(B) Show the steps and calculate the amount of the covered interest arbitrage profit
1(C) Determine a theoretical 6o-day forward rate (round to 4 decimal places) that will result in a zero covered interest arbitrage profit.
1(D) The following appeared in the Feb. 4, 2016 Wall Street Journal article "Dollar Continues to Fall Ahead of Friday's Jobs Report":
Investors have been fleeing the dollar in recent days, amid expectation that the Federal Reserve won't be able to raise interest rates as much as expected this year due to soft growth in the U.S. and turbulent global markets. Such persistently low interest rates weigh on the U.S. currency, as they make the dollar less attractive to yield-seeking investors. The dollar has now fallen 2.6% against a basket of currencies in February.
Explain (not more than half of a page) the above narrative with the interest rate parity relationship
