1. Assume the following information:
a. Spot Rate of Pounds = $1.60
b. 180 day forward rate of Pounds = $1.56
c. 180 day British interest rate = 4%
d. 180 day U.S. interest rate = 3%
Based on the above information, is covered interest arbitrage by the U. S. investor feasible?
Please show your work/calculations and explain your answer.
2. Assume the spot exchange rate of the Singapore dollar is $.70. The one-year interest rate is 11% in the U.S. and 7% in Singapore. What will the spot rate be in one year according to the International Fischer Effect (IFE), You may use the approximate formula to answer this question.
3. Thompson Corporation has recently initiated a market-based forecast system using the forward rate as an estimator of the future spot rate on the Japanese yen and the Australian dollar. Below are the forecasted and realized values for the last period:
CURRENCY FORCASTED VALUE REALIZED VALUE
Australian dollar $0.60 $0.55
Japanese yen $0.0067 $0.0069
4. According to the information provided above and using the absolute forecast error as percentage of the realized value, which currency has Thompson forecasted more accurately and by what percentage? Explain.
