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Kennett Company purchased a machine Ex. 1 Kennett Company purchased a machine on January 1, 2011. In addition to the purchase price paid, the following additional costs were incurred: (a) sales tax paid on the purchase price, (b) transportation and insurance costs while the machinery was in transit from the seller, (c) personnel training costs for initial operation of the machinery, (d) annual city operating license, (e) major overhaul to ...

Other / Other 16 Apr 2016

Besides the bid and ask quotes for the Thai baht 1. The first arbitrage opportunity relates to locational arbitrage. Holt has obtained spot rate quotations from two banks in Thailand, Minzu Bank and Sobat Bank, both located in Bangkok. The bid and ask prices of Thai baht for each bank are displayed in the table below: Minzu Bank Sobat Bank Bid $0.0224 $0.0228 Ask $0.0227 $0.0229 Determine whether the foreign exchange quotations a ...

Other / Other 16 Apr 2016

Explain the concept of triangular arbitrage 1. Triangular Arbitrage. Explain the concept of triangular arbitrage and the scenario necessary for it to be plausible. 2. Triangular Arbitrage. Assume the following information: Quoted Price Value of Canadian dollar in U.S. dollars $.90 Value of New Zealand dollar in U.S. dollars $.30 Value of Canadian dollar in New Zealand dollars NZ$3.02 Given this information, is triangula ...

Other / Other 16 Apr 2016

The South African rand has a one-year forward premium 1. Covered Interest Arbitrage in Both Directions . Assume that the annual U.S. interest rate is currently 8 percent and Germany’s annual interest rate is currently 9 percent. The euro’s one-year forward rate currently exhibits a discount of 2 percent. a. Does interest rate parity exist? b. Can a U.S. firm benefit from investing funds in Germany using covered interes ...

Other / Other 16 Apr 2016

What is the yield to a U.S. investor who conducts covered interest arbitrage 1. Deriving the Forward Rate. Assume that annual interest rates in the U.S. are 4 percent, while interest rates in France are 6 percent. a. According to IRP, what should the forward rate premium or discount of the euro be? b. If the euro’s spot rate is $1.10, what should the one-year forward rate of the euro be? 2. Covered Interest Arbitrage in Both D ...

Other / Other 16 Apr 2016

Explain how such expectations could have affected U.S. interest rates 1. Covered Interest Arbitrage. Assume the following information: Spot rate of Mexican peso = $.100 180 day forward rate of Mexican peso = $.098 180 day Mexican interest rate = 6% 180 day U.S. interest rate = 5% Given this information, is covered interest arbitrage worth¬while for Mexican investors who have pesos to invest? Explain your answer. 2. Ef ...

Other / Other 16 Apr 2016

Interpreting a Large Forward Discount 1. Interpreting Changes in the Forward Premium. Assume that interest rate parity holds. At the beginning of the month, the spot rate of the Canadian dollar is $.70, while the one-year forward rate is $.68. Assume that U.S. interest rates increase steadily over the month. At the end of the month, the one-year forward rate is higher than it was at the beginning of the month. Yet, the one-year forward di ...

Other / Other 16 Apr 2016

Explain the concept of locational arbitrage 1. Locational Arbitrage. Explain the concept of locational arbitrage and the scenario necessary for it to be plausible. 2. Locational Arbitrage. Assume the following information: Beal Bank Yardley Bank Bid price of New Zealand dollar $.401 $.398 Ask price of New Zealand dollar $.404 $.400 Given this information, is locational arbitrage possible? If so, explain the steps invol ...

Other / Other 16 Apr 2016

Assume that the forward rate premium of the euro was higher 1. Changes in Forward Premiums. Assume that the forward rate premium of the euro was higher last month than it is today. What does this imply about interest rate differentials between the United States and Europe today compared to those last month? 2. Interest Rate Parity. If the relationship that is specified by interest rate parity does not exist at any period but does exist ...

Other / Other 16 Apr 2016

Covered Interest Arbitrage in Both Directions 1. Covered Interest Arbitrage in Both Directions . Assume that the existing U.S. one year interest rate is 10 percent and the Canadian one year interest rate is 11 percent. Also assume that interest rate parity exists. Should the forward rate of the Canadian dollar exhibit a discount or a premium? If U.S. investors attempt covered interest arbitrage, what will be their return? If Canadian ...

Other / Other 16 Apr 2016