Pound in United States Dollars
Franc in United States Dollars
Pound in French Francs
a) You have $1,000,000 to invest. The current spot rate of the Pound is $2.00. The 90-day forward rate of the Pound is $2.00. The 90-day interest rate in the United States is 2 percent. The 90-day interest rate in Great Britain is 4 percent. Are there any possible profit opportunities? Describe in detail exactly what you would do. What profit would you achieve?3) Assume that France and the United States trade extensively with each other. Assume that initially the equilibrium value of the French franc is $.20. Then, assume that the United States experiences 1% inflation while France experiences 6% inflation. According to the PPP theory what will be the spot rate of the franc?
b) Market forces have adjusted the rates above to the following: The current spot rate of the Pound is $2.01; the 90-day forward rate of the Pound is $1.99; the 90-day interest rate in the United States is 2.47 percent; the 90-day interest rate in Great Britain is 3.5 percent. Retrace your previous steps to see if there are any possible profit opportunities.
|Assets||Liabilities & Equity|