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5 pts)The 6-month forward discount for converting the U.S. dollar into the British pound is 34%...

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Finance

  1. 5 pts)The 6-month forward discount for converting the U.S.dollar into the British pound is 34% and 6-month U.S. Treasurybills yield 1.56%. Based on interest rate parity, what should bethe 6-month British Treasury bill yield?
  1. (10 pts)The current exchange rate is one Australian dollar(AUD) equal to 1.349 USD.   In the United States,the 6 months T-bill rate is 84%. The 6-month forward rate for AUDis .75 USD/AUD.  Assuming that interest rate parityexists, what is the implied interest rate for Australia?
  1. (15 pts)Suppose the following conditions exist between the U.S.and Canada. 6 month U.S. interest rate = 4.5%. Canadian interestrate = 4%.  Spot rate: 1 CAD = .9537 USD. 6 month forwardrate: 1 CAD = .9612 USD. Are the conditions of interest rate parityviolated? If so, what would be our profit if we engaged in coveredinterest arbitrage by borrowing $2M in the U.S.?

Answer & Explanation Solved by verified expert
4.1 Ratings (760 Votes)
Answer 1 Forward discount USD is trading weaker relative to British pound since it is trading at a discount means USD interest rate is higher than the British pound Interest rate parity formula ForwardGBPUSDSpotGBPUSD 1iGBP1iUSD    See Answer
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