Question

国际金融学计算题(英文)

(1)Assumption:
At 10 am. on one business day, the exchange rate between US dollar and DM is stated $1=DM1.4500 in New York, while simultaneously the exchange rate between US dollar and DM is stated $1=DM1.4600 in Frankfurt.
Questions:
How to arbitrage?
(2)Assumption:
The one-year periodic interest rate of US dollar in U.S is 12%, while the one-year periodic interest rate of UK pound in U.S is 16%.
£1=$2.0000, $1,000,000
Questions:
-If the exchange rate between US dollar and UK pound is fixed, how to invest?
-If the exchange rate between US dollar and UK pound is floating, how to invest?

拜求正确解答~! (英文作答)

Answer 1

(1)use DM 1.45 to buy $1 in New York and sell $1 in Frankfurt,get DM 1.46. You get DM 0.01.

(2)
--Fixed
buy £ with your $1,000,000, hold £500,000 for 1 year period and get interst £(500,000 *16%)=80,000, then buy back $ with all your £580,000, you get $1,160,000.
However if you hold initial $1,000,000 for 1 year period, you only get $1,120,000.
You win $40,000 via buy and hold £.
--floating
You may not get this part profit as in fixed through hold £. As i year later when buy back $, the exchange rate may change to £1=$2.1 or even higher.
You have to face some risk if your still do the same trade as in fixed rate.
But for carry trade player, they generally put their money in high yiled currency.