Spring International Finance Assingment Help With Solution
Introduction: This exercise will walk you thru collecting and analyzing exchange rate data to test for parity and arbitrage opportunities.
Choose a country with a floating exchange rate (aside from the USA and UK). The list of possible countries can be found here:
1. Gather your data:
A. What is the spot rate against the US dollar?
B. What are the 1 and 2 year and 3 and 6 monthforward ratesagainst the US dollar?
• Go to the Wall Street Journal’s Market Data Center:
i. Click on “FX” then “Currency Futures Intraday” and select your currency.
C. What are the most recent annual inflation rates for the US dollar and your currency?
D. Find the current interest rate being offered on new 1 yeargovernment bonds for each country
• US Treasuries:
i. Note: You are looking for the results of the most recent 52 week bill auction
• You will need to search a little for your currency, see me if you have difficulty.
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A. Calculate the 3 and 6 monthforward premiums or discounts and interpret them.
B. Assuming that the inflation rates remain consistent use the purchasing power parity equation to determine your best estimate of the exchange rate between the US dollar and your currency in 3 months, 6 months and next year.
C. Use the data for 1 year investment in government bonds to calculate your best estimate of the implied spot rate between your currency and the US dollar in 1 & 2 years and 3 & 6 months (4 calculations).
D. Use the data for 1 year investment in government bonds to calculate your best estimate of the implied 2 yearforward rate.
E. In the absence of transactions costs, is there an arbitrage opportunity between your currency and the US dollar?
i. If so, in which way would funds flow?
ii. How much profit could be made on an investment of $1,000,000?
3. Comparisons and Analyses:
A. Based on your answers to 2A, is the US dollar expected to appreciate or depreciate relative to your currency?
B. How do your answers in 2B compare with the forward rates found in 1B?
C. How does your answer to 2C compare with the forward rates found in 1B?
D. How does your answer to 2D compare with the forward rates found in 1B?
E. How do your answers to 2C and 2D differ, why?
F. Use the skills you learned in class, recent news reports and current economic conditions of your country and the United States to explain these comparisons (3A-E).
G. Look up the transactions costs…. Could you really make a profit (assuming you had $1millio to invest?)
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