Professor Ted Azarmi's Forum

Guest


Author Topic: Your full name for grading of the homework  (Read 2870 times)

Offline Ted Azarmi

  • Administrator
  • Super Hero
  • *****
  • Posts: 620
    • http://azarmi.info
Your full name for grading of the homework
« on: May 01, 2009, 11:40:17 am »
You can either post your name together with your homework or send me an email with your user name  on this board and your full name.  The second option is of course much more private, in case that you you have privacy concerns.

Offline Nadeem

  • Vice President Member
  • ********
  • Posts: 8
Nadeem Khan IRP Covered Interest Arbitrage
« Reply #1 on: January 28, 2012, 10:28:38 pm »
Homework for Interest Rate Parity

One year Japanese bond pays 3.5% interest
Rf = 0.035 nominal interest rate

One year US Treasury notes pay 9% interest
Rd= 0.09

Japanese Yen/ Dollar spot rate is 125
S=125 Yen per Dollar

Japanese Yen/ Dollar forward rate 115
F=115 Yen per Dollar

Is Dollar at a forward premium or a discount?

Does interest parity hold?

 F/S=(1+Rf)/(1+Rd)

F/S= 115/125= 0.92

1.035/1.09= 0.949

0.92 = 115-125 (= ?) 1.035/1.09= 0.949

                           NO
                           <
Which interest rate is to high?
3.5 % interest in Japan is too high for interest rate parity to hold. If it decrease to 0.007% interest parity holds.

Covered Interest Arbitrage

1. Borrow at the cheap US interest rate of 9%.

10,000,000 Dollar loan= >

Owe (1.09) (10,000,000) = $10,900,000 next year

2. Sell US $ and buy Yen at the Spot market.

Exchange the borrowing in US $ to Japanese Yen at the Spot rate of 125 Yen per $.

$10,000,000 X 125 Yen = 1,250,000,000 Yen



3. Buy US $ one year forward to “cover” your loan.

Buy $ 10,900,000 forward hedge coverage.

Pay $ 10,900,000 X 115 Yen
= 1,253,500,000 Yen

This money comes from the proceeds of the Japanese loan. Receive $10,900,000 from the forward market next year and use it to pay for the US loan of $10,900,000.

4. Loan at the Japanese market

Loan 1,250,000,000 Yen at 3.5% in Japan.

Receive 1,250,000,000 Yen (1.035) = 1,293,750,000 Yen next year

Arbitrage profit

1,293,750,000 Yen - 1,253,500,000= 40,250,000 Yen  profit



Offline halaeldarwish

  • Sr. Member
  • ****
  • Posts: 4
Hala Abdelkader Ibrahim Eldarwish
« Reply #2 on: October 10, 2016, 12:37:08 pm »
nominal interest rate in Egypt   11.60%   
nominal interest rate in U.S   3.30%   
Forward rate   9.21   egp/dollar
spot rate   8.88   egp/dollar
      
      
F/S   1.037162162   
ratios   1.0803485   
      
F/S<1   dollar becomes cheaper in the future   
interest rate in Egypt must decrease to 7.122% for parity holds      
or interest rate in U.S must increase to 7.618%      
      
We have a loan of 10,000,000 in U.S with cheap rate 3.3%       
We must pay next year    10,330,000.00    dollars
      
We convert dollars to egp    91,730,400.00    egyptian pounds
      
We give a loan in egyptian pounds for 1 year with rate 11.60%      
We receive next year   102371126.4   egyptian pounds
      
We buy a 1-year forward contract      
 95,139,300.00    egyptian pounds   paid next year
      
Arbitrage profit    7,231,826.40    egyptian pounds

Offline antoinemichel

  • Platinum Member
  • *******
  • Posts: 7
Re: Your full name for grading of the homework
« Reply #3 on: October 11, 2016, 03:21:39 am »
Good morning,

Please find in attached document, my homework.

Kind regards,

Antoine Martin MICHEL

Offline malaaeld

  • Full Member
  • ***
  • Posts: 3
Re: (Mai Alaaeldin Elmonshed)
« Reply #4 on: October 12, 2016, 11:33:57 am »
1-year Egyptian bonds pay 2.5% interest
1-year Chinese bonds pay 8% interest
Chinese Yuan/EGP spot rate is 120
Chinese Yuan/EGP forward rate is 114
Is EGP at a forward premium or a discount?

114/120 (=?) 1.025/1.08
0.95 > 0.94
8% is too high for IRP to hold with 2.60% interest in Egyptian IRP holds.
1. Borrow at the cheap Egyptian IR of 2.5%
10,000,000 EGP loan ---> Owe 1.025 * 10,000,000= 10,250,000 EGP
2. Sell EGP and buy yuan at spot market
EGP 10,000,000/120 Yuan/EGP = 83,333 Yuan
3. Loan the Chinese market
83,333 Yuan * 1.08= 90,000 Yuan
4. Buy EGP one year forward to cover your loan
10,250,000/114 EGP/yuan = 89,912 Yuan
5. Arbitrage Profit ---> 90,000- 89,912= 87.72 Yuan

Mai Alaaeldin Elmonshed

Offline Yara Ahmed

  • Silver Member
  • *****
  • Posts: 5
Re: Your full name for grading of the homework
« Reply #5 on: October 18, 2016, 01:12:59 am »
nominal interest rate in Japan=  0.02   
nominal interest rate in U.S =  0.06   
Forward rate =  110   yen/dollar
spot rate=100   yen/dollar

F/S=(1+Rf)/(1+Rd) so 100/110 not equal (1+0.02)/(1+0.06)
 0.90 not equal 0.96 as F<S so it is at discount because 0.90<1
6% Interest rate is very small rate in U.S at 2% interest rate is very high in japan so we have to increase the interest rate in U.S to 13% or decrease the IR in Japan to (-4.6%)
 
covered interest arbitrage:

1- Borrow cheap in U.S with IR 6%,
     $ 20,000,000 loan* 1.02=20,400,000
2- sell $ and buy yen in spot market with 110 yen/$
      20,000,000*110=2,200,000,000
3- loan at Japanese market with IR 2%
      2,200,000,000*1.06=2,332,000,000
4-Buy $ to cover loan one year forward
      20,400,000*100=2,040,000,000
5- arbitrage profit=2,332,000,000-2,040,000,000=292,000,000 yen
     

Offline Anastasiia_Riame

  • Member
  • **
  • Posts: 2
Re: Your full name for grading of the homework
« Reply #6 on: January 22, 2018, 04:08:08 pm »
Anastasiia Riame

Interest Rate Parity

1 – Year Japanese bonds pay 4,2% interest
   Rf = 0.042
1 – Year US Treasury notes pay 7,5% interest
   Rd = 0.075
Japanese ¥/$ Spot Rate is 123
   S = 123 ¥/$
Japanese ¥/$ Forward Rate is 117
   F = 117 ¥/$

Is dollar at a foward Premium or Discount?
   F=117 < S=123 ; dollar is at the Forward Discount, F>S

Does the Interes Parity Hold?
   F/S (=?) (1+Rf)/(1+Rd)   ;    0.951 = 117/123 (=?) 1.042/1.075 = 0.97
                           <
            Parity Does Not Holds
   X/1.075 = 0.951 -> X = 0.951 * 1.075 = 1.022 -> 2,2%
1-Year Japanese bond interest rate is too high, it must decrease to 2,2% to make the Interest rate Parity Hold.

1. We borrow 1 000 000 $. We use the Spot Rate Interest to see how much we have to pay back next year.
   1 000 000 $ * (1+0.075) = 1 075 000 $ next year payment at Spot Rate Interest

2º  Exchange 1 000 000 $ to ¥ at the spot rate from Japan 123 ¥/$
1 000 000 $ * 123 ¥/$ = 123 000 000 ¥ *(1 + 0.042) = 128 166 000 ¥ next year payment

3º Exchange 128 166 000 ¥ at the forward rate 117 ¥/$
   128 166 000 ¥ / 117 ¥/$ = 1 095 435,9 $
4º Profit from arbitrage
   1 102 941 $ - 1 075 000 $ = 27 941$ of Profit

Offline pgarciab

  • Member
  • **
  • Posts: 2
Paloma García Blanco
« Reply #7 on: October 13, 2019, 08:13:46 pm »
Good afternoon,
Here i attached the Interest Rate Parity Homwork for this week.
Thank you beforehand.
Paloma García Blanco (ID: 204859)

Offline Timo

  • Full Member
  • ***
  • Posts: 3
Re: Your full name for grading of the homework
« Reply #8 on: November 07, 2019, 07:30:20 pm »
Timo Lepistö
204867
Forward exchange rate Y/$ = 115
Spot exchange rate Y/$ = 121
Japan nominal interest rate 4.5%
US nominal interest rate 7%
115/121 = 0,95 >   1,045/1,07 = 0,98   Interest Parity does not hold, Dollar is at the forward discount
 Japan interest rate 4,5% is too high, if it decreases to 2% rate parity holds
1. Borrow 1 000 000 $ -> 1 070 000 $ in next year, rate 7%
2. Exchange 1 000 000$ -> 121 000 000 Yen, rate 121 Yen/$
3. Loan 121 000 000 Yen -> 126 445 000 Yen receive next year, rate 4,5%
4. Buy $ one-year forward cover loan  1 070 000 * 115 = 125 350 000 Yen
5. 126 445 000 - 125 350 000 = 1 095 000 Yen profit