Professor Ted Azarmi's Forum

International Finance (Harvard Business School Lecture Notes; Multinational Financial Management, Alan C. Shapiro ) Heilbronn 2012-Present (prior lectures at University of Tuebingen, Cal State, Temple Uni; Int. Uni of Japan) => Lecture 2: Covered Interest Arbitrage => Topic started by: JuliaKessler on May 01, 2009, 11:01:46 am

Title: Solutions Covered Interest Arbitrage
Post by: JuliaKessler on May 01, 2009, 11:01:46 am
See solution attached
Have a nice holiday
Julia Kessler

Please register for the board to see the attached files.
Title: Re: Solutions Covered Interest Arbitrage
Post by: Sandra Hokenmaier on May 02, 2009, 01:14:08 pm
Exercise is attached.

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Sandra Hokenmaier
Title: Re: Solutions Covered Interest Arbitrage
Post by: M.Hareng on May 02, 2009, 05:20:05 pm
Solution is attached,

best regards,

Michael Hareng
Title: Re: Solutions Covered Interest Arbitrage
Post by: TanjaKroh on May 03, 2009, 01:34:20 pm
Exercise is attached.

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Tanja Kroh
Title: Re: Solutions Covered Interest Arbitrage
Post by: B.Tisch on May 03, 2009, 01:38:23 pm
Homework attached.
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Title: Re: Solutions Covered Interest Arbitrage
Post by: philippdannecker on May 03, 2009, 06:08:10 pm
Solution attached.

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Philipp Dannecker
Title: Re: Solutions Covered Interest Arbitrage
Post by: ChristianHattendorff on May 03, 2009, 06:18:55 pm
Please find the solution attached.

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Christian Hattendorff
Title: Re: Solutions Covered Interest Arbitrage
Post by: ElisabethBohnert on May 04, 2009, 08:11:27 pm
Hey!
Solutions are attached.
KInd Regards,
Elisabeth Bohnert
Title: Re: Solutions Covered Interest Arbitrage
Post by: ElisabethBohnert on May 04, 2009, 09:13:18 pm
Exercise is attached.

Best Regards,
Leonie Krauß
Title: Re: Solutions Covered Interest Arbitrage
Post by: DanielPlaner on May 04, 2009, 10:09:19 pm
Homework is attached as a Pdf file

Regards,
Daniel Planer
Title: Re: Solutions Covered Interest Arbitrage
Post by: HannahHerrmann on May 04, 2009, 10:30:29 pm
Homework is attached

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Hannah Herrmann
Title: Re: Solutions Covered Interest Arbitrage
Post by: simonevogelgsang on May 05, 2009, 12:50:27 pm

Exercise is attached.
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Simone Vogelgsang
Title: Re: Solutions Covered Interest Arbitrage
Post by: carolin.schmidt on May 05, 2009, 06:23:12 pm
Please find my solution attached.

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Carolin Schmidt
Title: Re: Solutions Covered Interest Arbitrage
Post by: Muschallik on May 05, 2009, 07:39:09 pm
Please find my solution attached.

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Julia Muschallik
Title: Re: Solutions Covered Interest Arbitrage
Post by: danielfroeschle on May 06, 2009, 01:32:22 pm
Solution attached

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Daniel Froeschle
Title: Re: Solutions Covered Interest Arbitrage
Post by: emelia on May 06, 2009, 01:52:09 pm
Here is my, Emelia Hjortenholt's, homework.
See you on thursday!
Title: Re: Solutions Covered Interest Arbitrage
Post by: bbruggem on May 06, 2009, 03:05:27 pm
Please find attached the solution for this week's homework.

Best regards,
Bettina Brüggemann
Title: Re: Solutions Covered Interest Arbitrage
Post by: simone.klausmann on May 06, 2009, 03:10:23 pm
Exercise is attached.

Best regards,
Simone Klausmann
Title: Re: Solutions Covered Interest Arbitrage
Post by: paula.schliessler on May 06, 2009, 03:15:44 pm
Please find attached my solution.
Paula Schliessler
Title: Re: Solutions Covered Interest Arbitrage
Post by: annika.kasparek on May 06, 2009, 06:15:02 pm
Please find solution attached.

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Annika Kasparek
Title: Re: Solutions Covered Interest Arbitrage
Post by: Carolynna on May 06, 2009, 06:18:06 pm
Please see attached.

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Carolynna Gabriel
Title: Re: Solutions Covered Interest Arbitrage
Post by: Matze on May 06, 2009, 06:20:31 pm
Homework is attached

greetings,
Matthias Pion
Title: Re: Solutions Covered Interest Arbitrage
Post by: psodtke on May 06, 2009, 06:33:16 pm
My exercise is attached.

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Peggy Sodtke
Title: Re: Solutions Covered Interest Arbitrage
Post by: Stephanie Bueck on May 06, 2009, 07:15:33 pm
My homework is attached

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Stephanie Bueck
Title: Re: Solutions Covered Interest Arbitrage
Post by: Jochen Schäfer on May 06, 2009, 07:32:28 pm
Exercise is attached.

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Jochen Schäfer
Title: Re: Solutions Covered Interest Arbitrage
Post by: sabine.pfaff on May 06, 2009, 07:33:25 pm
Solution is attached.

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Sabine Pfaff
Title: Re: Solutions Covered Interest Arbitrage
Post by: daniel_deo on May 06, 2009, 07:53:28 pm
Solution attached,
kind regards,

Daniel Ninnemann
Title: Re: Solutions Covered Interest Arbitrage
Post by: Sk8sSF on May 06, 2009, 08:46:15 pm
Homework solution is attached.

Regards,

Mackenzie Kelly
Title: Re: Solutions Covered Interest Arbitrage
Post by: Hendrik Sill on May 06, 2009, 09:55:51 pm
I attached my homework as a Word document.

Yours sincerely,
 Hendrik Sill




Title: Re: Solutions Covered Interest Arbitrage
Post by: AndiStaudacher on May 06, 2009, 10:18:25 pm
Homework is attached.

Best regards

Andrea Staudacher
Title: Re: Solutions Covered Interest Arbitrage
Post by: skstein on May 06, 2009, 11:13:46 pm
Here is my homework.

See you in class tomorrow,

Sarah K. Stein
Title: Re: Solutions Covered Interest Arbitrage
Post by: Alena Hörger on May 06, 2009, 11:35:40 pm
Find the Homework solution attached.

Best regards,
 
Alena Hörger
Title: Re: Solutions Covered Interest Arbitrage
Post by: KarinL on May 06, 2009, 11:39:57 pm
Homework attached.
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KarinL
Title: Re: Solutions Covered Interest Arbitrage
Post by: Hülle on May 07, 2009, 12:05:35 am
See solution attached.

See you soon, Matthias
Title: Re: Solutions Covered Interest Arbitrage
Post by: Katha on May 07, 2009, 12:57:42 am
Please find the homework attached,

best regards, Katha
Title: Re: Solutions Covered Interest Arbitrage
Post by: Arrow on May 07, 2009, 01:06:54 am
Solution is attached,

Best regards,

Michael Wagner
Title: Re: Solutions Covered Interest Arbitrage
Post by: Sarina Mauthofer on May 07, 2009, 11:12:29 am
Please see my solution attached.
Best regards,
Sarina Mauthofer
Title: Re: Solutions Covered Interest Arbitrage
Post by: mia on May 07, 2009, 11:46:15 am
 Homework attached!  ;D 
 Have a nice day, see you in the afternoon!!

Miaomiao Zhu
Title: Re: Solutions Covered Interest Arbitrage
Post by: Winge on May 07, 2009, 11:50:24 am
Homework is attached.

Greetings
Winfried Gernert
Title: Re: Solutions Covered Interest Arbitrage
Post by: mary1405 on May 07, 2009, 12:56:12 pm
Please find my homework attached.
Greetings, Marion
Title: Re: Solutions Covered Interest Arbitrage
Post by: MareikeR on May 07, 2009, 01:16:36 pm
Please find my homework attached.

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Title: Re: Solutions Covered Interest Arbitrage
Post by: toshiya_diru on May 07, 2009, 01:47:12 pm
homework attached
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Cui Jinjing
Title: Re: Solutions Covered Interest Arbitrage
Post by: CProebsting on May 07, 2009, 01:56:39 pm
See solution attached,

kindly,
Christian Pröbsting
Title: Re: Solutions Covered Interest Arbitrage
Post by: OliverK on May 07, 2009, 02:33:32 pm
Please find my homework attached!

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Oliver Kroll
Title: Re: Solutions Covered Interest Arbitrage
Post by: Raible on May 07, 2009, 02:41:47 pm
Solution attached.

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Leonie Raible
Title: Re: Solutions Covered Interest Arbitrage
Post by: JavierF on May 07, 2009, 03:48:56 pm
Find my solutions attached.

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Javier Friedlmeier
Title: Re: Solutions Covered Interest Arbitrage
Post by: FelixF on May 07, 2009, 10:12:50 pm
Solution attached.

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Felix Faißt
Title: Re: Solutions Covered Interest Arbitrage
Post by: christine84 on May 07, 2009, 11:32:38 pm
Attached is my homework!

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Christine Scheef
Title: Re: Solutions Covered Interest Arbitrage
Post by: larissa on May 08, 2009, 10:19:26 am
Solution attached.

Best regards,
Larissa Mader
Title: Re: Solutions Covered Interest Arbitrage
Post by: Anne on May 08, 2009, 08:34:29 pm
Please find my solution attached.

Have a nice weekend,

Anne Hempelmann
Title: Re: Solutions Covered Interest Arbitrage
Post by: Sébastien.Fabre on May 09, 2009, 10:06:04 pm
Please find enclosed the homework solution.
See you in class.
Bye.
Sébastien Fabre
Title: Re: Solutions Covered Interest Arbitrage
Post by: ellmar on May 10, 2009, 06:08:45 pm
home work is attached.
Best regards
Ellmar Jungschaffer
Title: Re: Solutions Covered Interest Arbitrage
Post by: ChristianFalk on May 10, 2009, 08:16:29 pm
Solution attached

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Christian Falk
Title: Re: Solutions Covered Interest Arbitrage
Post by: Michal Wilczek on May 11, 2009, 10:46:21 am
Solution attached,

Best regards,

Michal Wilczek
Title: Re: Solutions Covered Interest Arbitrage
Post by: lena on May 11, 2009, 01:31:39 pm
Solution attached!

Kind regards, Lena
Title: Re: Solutions Covered Interest Arbitrage
Post by: olga m. on May 11, 2009, 02:11:56 pm
Interest Rate Parity / Covered Interest Arbitrage

Interest rates:

1-year British bonds pay 4.1% interest:           R_f = 0.041
1-year US Treasury notes pay 2.5% interest:   R_d = 0.025

British Pound / US dollar spot rate is 0.67 :      S = 0.67 BP/USD
British Pound / US dollar forward rate is 0.68:   F = 0.68 BP/USD

Does the Interest Parity hold?
F/S = 0.68 / 0.67 = 1.01 (=?) 1.041 /1.025 = 1.0156
                                  (NO)
                                  ( < )
Which interest rate is too high ?

4.1% interest in the UK is too high for interest parity to hold.
If it decreases to 3.525% interest rate parity holds: 1.03525 / 1.025 = 1.01 .
2.5% in the US  is a low borrowing cost after accounting for BP/USD forward and spot rates.

Covered Interest Arbitrage

1.) Borrow at the cheap US interest rate of 2.5%:
     $ 1,000,000 loan -> owe $ 1,000,000*1.025 = $1,025,000 next year

2.) Sell $ and buy BP at the spot market:
     Exchange the borrowing in US $ to UK BP at the spot rate of 0.67 BP/$:
     $ 1,000,000*0.67 BP/$ = BP 670,000

3.) Loan at the UK markets:

     Loan BP 670,000 at 4.1% in the UK. Receive BP 670,000*1.041= BP 697470 next year

4.) Buy US $ one year forward to ''cover'' your loan:
     Buy $ 1,025,000 Forward hedge coverage:
     Pay $ 1,025,000*0.68 BP/$ = BP 697,000 next year from the proceeds of the UK loan.
     Receive $ 1,025,000 next year and use it to pay for the US loan.

5.) Arbitrage Profit
     BP 697,470 - BP 697,000 = BP 470

Best regards

Olga Max
Title: Re: Solutions Covered Interest Arbitrage
Post by: Daniel Jäger on May 11, 2009, 03:40:41 pm
Homework attached.
Best regards, Daniel Jäger
Title: Re: Solutions Covered Interest Arbitrage
Post by: NikolasGerlich on May 11, 2009, 03:44:25 pm
homework attached.
Nikolas Gerlich
Title: Re: Solutions Covered Interest Arbitrage
Post by: Chrizzo on May 11, 2009, 11:52:16 pm
Please find my HW n° 2 attached.

Regards,
Christoph Schröder
Title: Re: Solutions Covered Interest Arbitrage
Post by: shohendorff on May 12, 2009, 01:05:27 am
please find my homework attached.

Best regards
Stephanie Hohendorff
Title: Re: Solutions Covered Interest Arbitrage
Post by: J.Ritter on May 12, 2009, 11:07:51 am
Homework is attached.
Take care,

Julian Ritter
Title: Re: Solutions Covered Interest Arbitrage
Post by: CalleyBilgram on May 12, 2009, 12:00:30 pm
My answers are attached.  See you Thursday!

All the best,
Calley Bilgram
Title: Re: Solutions Covered Interest Arbitrage
Post by: FloB on May 12, 2009, 03:27:39 pm
Schöne Grüße
Florian Braun
Title: Re: Solutions Covered Interest Arbitrage
Post by: DanielGebauer on May 12, 2009, 05:43:30 pm
Solution is attached.



Best regards,

Daniel Gebaer
Title: Re: Solutions Covered Interest Arbitrage
Post by: magicblu on May 12, 2009, 07:54:36 pm
Please find my solutions to the assignment attached.
Kind regards,
Annette
Title: Re: Solutions Covered Interest Arbitrage
Post by: Benjamin Guin on May 12, 2009, 08:34:45 pm
I had not uploaded this one yet.

With best regards,
Benjamin
Title: Re: Solutions Covered Interest Arbitrage
Post by: MarieHeydenreich on May 13, 2009, 07:52:32 pm
Here is also my solution!
Marie Heydenreich
Title: Re: Solutions Covered Interest Arbitrage
Post by: TobiasF on May 13, 2009, 10:55:24 pm
Please find my solution attached.
Regards,
Tobias Frasch
Title: Re: Solutions Covered Interest Arbitrage
Post by: jensonpoon on May 14, 2009, 01:18:12 am
Dear all,

Attached please find my solution.

Best Regards,
Chun Jenson Poon
Title: Re: Solutions Covered Interest Arbitrage
Post by: Renchen on May 14, 2009, 10:04:20 pm
Please find my Homework attached.

Best regards,
Irene Komarowsky
Title: Re: Solutions Covered Interest Arbitrage
Post by: rolf.schmucker on May 15, 2009, 11:24:25 am
You find the solution attached.
Kind regards
Rolf Schmucker
Title: Re: Solutions Covered Interest Arbitrage
Post by: christiansprenger on May 15, 2009, 11:39:26 am
Homework is attached.

Best regards,
Christian Sprenger
Title: Re: Solutions Covered Interest Arbitrage
Post by: martina.weisser on May 16, 2009, 09:47:12 pm
Please find my solutions attached.
Sorry for the late answer.
Best regards,
Martina
Title: Re: Solutions Covered Interest Arbitrage
Post by: catia45 on May 17, 2009, 06:53:12 pm
Solutions attached,

Sincerily,

Kathrin Leimann
Title: Re: Solutions Covered Interest Arbitrage
Post by: kathrinheidl on May 18, 2009, 01:15:09 pm
Homework is attached.

Best regards,
Kathrin Heidl
Title: Re: Solutions Covered Interest Arbitrage
Post by: Maric1601 on May 19, 2009, 07:25:40 am
Here is my homework.

Best regards,

Marko Maric
Title: Re: Solutions Covered Interest Arbitrage
Post by: matthiaszembrod on May 19, 2009, 12:38:51 pm
solution attached

best regards,
Matthias Zembrod
Title: Re: Solutions Covered Interest Arbitrage
Post by: verygaoxing on May 23, 2009, 07:29:43 pm
solution attached

best regards,
Diana Ta
Title: Re: Solutions Covered Interest Arbitrage
Post by: Sarah.H on May 25, 2009, 11:31:54 am
Please find my solution attached.

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Sarah Hofmann
Title: Re: Solutions Covered Interest Arbitrage
Post by: JonasEichner on May 25, 2009, 11:34:01 pm
Thank you for the extension. Please find my solution attached.

Best,
Jonas Eichner
Title: Re: Solutions Covered Interest Arbitrage
Post by: gustavkasselstrand on May 27, 2009, 02:37:56 am
Solution attached.

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Gustav Kasselstrand
Title: Re: Solutions Covered Interest Arbitrage
Post by: florian totzauer on May 28, 2009, 12:01:56 am
Please find homework attached
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Florian Totzauer
Title: Re: Solutions Covered Interest Arbitrage
Post by: DariaPamfilova on May 28, 2009, 10:47:31 pm
Solution attached,

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Pamfilova Daria
Title: Re: Solutions Covered Interest Arbitrage
Post by: malijung on May 31, 2009, 06:49:57 pm
My homework is attached.

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Malika Jung
Title: Re: Solutions Covered Interest Arbitrage
Post by: TK8981 on June 01, 2009, 06:57:06 pm
Homework is attached.

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T
Title: Re: Solutions Covered Interest Arbitrage
Post by: BeateBraun on June 05, 2009, 09:13:31 am
Please find my solutions attached.

Kind regards, Beate Braun
Title: Solutions Covered Interest Arbitrage
Post by: Michaela Müller on June 06, 2009, 01:25:32 pm
homework is attached, sorry for the delay

regards

Michaela Müller
Title: Re: Solutions Covered Interest Arbitrage
Post by: dzmitry.kuryla on June 07, 2009, 11:43:14 pm
find my hommework attached,

Best Regards,
Dzmitry Kuryla
Title: Re: Solutions Covered Interest Arbitrage
Post by: O. Krebs on June 08, 2009, 01:16:22 pm
Please find my homework attached,
Oliver Krebs
Title: Re: Solutions Covered Interest Arbitrage
Post by: InaRapp on June 08, 2009, 02:10:46 pm
Sorry for the delay,

please find my homework attached.

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Ina Rapp
Title: Re: Solutions Covered Interest Arbitrage
Post by: haze1lovely on June 09, 2009, 04:53:24 pm
Homework attached.

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Jiaxi Gong
Title: Re: Solutions Covered Interest Arbitrage
Post by: Ludovic on June 15, 2009, 11:25:44 pm
Sorry for the delay; you'll find my homework attached.

Ludovic Oudard
Title: Re: Solutions Covered Interest Arbitrage
Post by: Niclas Huck on June 23, 2009, 10:02:30 am
Please find attached my homework.

Best regards
Niclas Huck
Title: Re: Solutions Covered Interest Arbitrage
Post by: leyre on June 28, 2009, 03:35:58 pm
please find attached my homework

best regards
Leyre Torres
Title: Re: Solutions Covered Interest Arbitrage
Post by: sulyLozano on June 28, 2009, 05:13:02 pm
exercise attached

Thanks
Suly Lozano
Title: Re: Solutions Covered Interest Arbitrage
Post by: zxmgh07 on July 03, 2009, 04:25:56 pm
find the exercise attached
Title: Re: Solutions Covered Interest Arbitrage
Post by: Cristina_M on July 12, 2009, 02:23:38 pm
please find my homework attached.
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Cristina Mocanu
Title: Re: Solutions Covered Interest Arbitrage
Post by: Frank Streif on July 27, 2009, 09:22:15 am
Please find my document attached.
Regards,
Frank
Title: Re: Solutions Covered Interest Arbitrage
Post by: MarioLebherz on July 29, 2009, 03:53:12 pm
Solution attached.
Best regards,
Mario
Title: Re: Solutions Covered Interest Arbitrage
Post by: leoniekrauss on August 01, 2009, 08:55:07 pm
I found a mistake in my homework! Here is the corrected version!

Best regards,

Leonie Krauß
Title: Re: Solutions Covered Interest Arbitrage
Post by: CarlPhilippLins on August 02, 2009, 01:32:31 pm
Prep attached.

Carl Philipp Lins
Title: Re: Solutions Covered Interest Arbitrage
Post by: david.feierabend on August 02, 2009, 04:55:38 pm
Please find the excercise attached.
Regards, David
Title: Re: Solutions Covered Interest Arbitrage
Post by: Florian_Hirschmann on August 03, 2009, 04:33:27 pm
Dear Mr. Azarmi,

see my homework attached!
Kind regards,
Florian Hirschmann
Title: Re: Solutions Covered Interest Arbitrage
Post by: Wilhelm Maximilian Hammes on August 03, 2009, 05:12:31 pm
Prep attached

Many thanks & best regards

Wilhelm Hammes
Title: Re: Solutions Covered Interest Arbitrage
Post by: Borislava Ivanova on August 03, 2009, 09:59:17 pm
Homework is attached!

Best regards
Borislava Ivanova
Title: Re: Solutions Covered Interest Arbitrage
Post by: Arrow on August 05, 2009, 08:26:17 pm
Hello,

i reworked my homework (put the comma in the right order)

Best regards,

Michael Wagner
Title: Re: Solutions Covered Interest Arbitrage
Post by: Arrow on August 05, 2009, 08:29:42 pm
... and i made a second example for IRP/covered interest arbitrage to become a "super hero"  :P

Michael Wagner
Title: Re: Solutions Covered Interest Arbitrage
Post by: megirad on October 13, 2009, 01:06:13 am
Please find my homework attached!

best regards,
Madlena
Title: Re: Solutions Covered Interest Arbitrage
Post by: RoyaS. on October 13, 2009, 11:08:37 pm
Dear Prof. Azarmi,

please find my homework attached!

warm regards

Roya
Title: Re: Solutions Covered Interest Arbitrage
Post by: malijung on October 14, 2009, 04:38:52 pm
I just found a few mistakes on my homework.
Please consider the now attached corrected homework.
Thank you!
Title: Solutions Covered Interest Arbitrage
Post by: Melina on October 14, 2009, 06:57:49 pm
Hello,

my homework is attached.

Melina Bäßler
Title: Re: Solutions Covered Interest Arbitrage
Post by: xtz33 on October 16, 2009, 09:44:33 pm
Hello, please find my homework attached.

Best,
Martin
Title: Re: Solutions Covered Interest Arbitrage
Post by: benjamin1979 on October 17, 2009, 10:34:30 am
Please find attached my homework,

Regards Benjamin
Title: Re: Solutions Covered Interest Arbitrage
Post by: Jessica82 on October 18, 2009, 07:25:04 pm
Covered Interest Arbitrage Class Exercise

2-year German Government bonds pay 3.75% interest
Rf = 0.0375

2-year U.S. Treasuries pay 0.5% interest
Rd = 0.005

€/ USD spot rate is 0.67
S = € 0.67 / USD

€/ USD 2-year forward rate is 0.69
F = € 0.69 / USD

Is USD at a forward premium or a forward discount?
F/S = 1.03 >1  that means USD is at a forward premium

Does the Interest Rate Parity (IRP) hold?
If it holds: F/S = (1+ Rf) / (1+ Rd)
Here:      1.03 > 1.032  so IRP does not hold!

Which interest rate is too high?
3.75% interest in Germany is too high for interest parity to hold. If the rate decreases to 3.515 %, interest rate parity holds.

Because the IRP does not hold, we can do covered interest arbitrage to profit from that.

1. We borrow 1,000,000 USD at the cheap US interest rate of 0.5 %.
Owe (1,000,000) (1.005) = USD 1,005,000 in two years

2. We exchange the borrowing in USD to EUR at the spot rate of  0.69 €/ USD.
(USD 1,000,000) * 0.69 €/ USD = EUR 690,000

3. We then loan EUR 690,000 at the German markets at 3.75% interest.
Receive (EUR 690,000) (1.0375) = EUR 715,875 in two years

4. We buy a USD 1,005,000 forward hedge coverage
Pay USD 1,005,000 * € 0.69 / USD = EUR 693,450 in two years

This money comes from the proceeds of the German loan.
We receive USD 1,005,000 from the forward market in two years.
We then use this money to pay off the US loan of USD 1,005,000.

Arbitrage Profit:
EUR 715,875 - EUR 693,450 = EUR 22,425

This money can be exchanged to USD at the spot market.