Question Details

Changes in Forward Premiums 



1.	Interest Rate Parity. Consider investors who invest in either U.S. or British one year Treasury bills.  Assume zero transaction costs and no taxes.

a.	If interest rate parity exists, then the return for U.S. investors who use covered interest arbitrage will be the same as the return for U.S. investors who invest in U.S. Treasury bills.  Is this statement true or false?  If false, correct the statement.  
b.	If interest rate parity exists, then the return for British investors who use covered interest arbitrage will be the same as the return for British investors who invest in British Treasury bills.  Is this statement true or false?  If false, correct the statement.

2.	Changes in Forward Premiums . Assume that the Japanese yen- forward rate currently exhibits a premium of 6 percent and that interest rate parity exists.  If U.S. interest rates decrease, how must this premium change to maintain interest rate parity?  Why might we expect the premium to change?



Business Management Assignment Help, Business Management Homework help, Business Management Study Help, Business Management Course Help