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Finance assignment question 3

HW 1

Be sure to answer each and every portion of the question, many of them have multiple parts. Be sure to include enough information to show that you know how to compute the answers. Show your work, a singular answer, even if correct will not garner full points. Additionally, ensure that you upload a single document in either pdf or doc format.

  1. Suppose that in NY that$/€=1.275, and $/£ = 1.412. In London, you see €/£ is 1.198. Is there an arbitrage opportunity? Why or why not? Calculate the profit to be made on $1,000,000.
  2. Show what would happen to the $/¥ exchange rate if interest rates in Japan began to rise. Would the dollar appreciate/depreciate? What about the yen? (Be sure to include the appropriate graphs)
  3. Suppose the $/£ = 1.624 on Monday and becomes 1.631 on Friday. Did the dollar appreciate or depreciate relative to the pound?How much was the appreciation/depreciation in percentage change terms?
  4. Using the appropriate graphs, show what would happen to the following exchange rates: $/€, $/£, and €/£, when Janet Yellen announced on July 10 that they would allow interest rates to rise in October. Suppose you had inside information and knew what she was going to say before she said it, how could you make a profit? Who is Janet Yellen?
  5. Suppose that €/£ is 1.451 in New York and is 1.463 in Hong Kong. Explain how you might be able to make a profit. How much risk is involved with this transaction?
  6. If there are differences between interest rates in various countries, what will investors do with their funds? Are US investors able to purchase euros and make a profit? How is it that exchange rates change depending on the interest rates in a given country?
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