Problem 1.) One year zero coupon US selling $950.57 and UK938.97, both face value 1000 ($1,000 in US, 1,000 in UK). Spot ex rate is $2.0609/bp and one year forward rate is $2.0403/bp
a) Calculate one yr interest rates in US and U.K
b) Calculate & report 1 year forward discount (%) or premium (%) for BP
c) Interest rate parity holding? why or why not? use formula iUS=iUK+/-%BP
d) How can you make arbitrage profits with 1m us or 1m uk
e) Show calculation arbitrage trading and calculate arbitrage profits
Problem 2.) U.S BANK HAS $120M of dollar dominated loans @8% and $80m of dollar donominated deposit at 6% and $40m of british pound denominated deposits 5.5%. current ex rate is $2.00/bp. calculate banks net interest income in dollars under following assumptions.
a) Exchange rate stays same
b) Exchange rate $2.18bp in one year
c) Exchange rate $1.90 bp in one year