Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. accounting
  3. problem: *liberia interest rate = 7% *u.s. interes

PROBLEM: *Liberia Interest rate = 7% *U.S. Interest rate = 2% Spot exchange rate between...

90.2K

Verified Solution

Question

Accounting

PROBLEM:

*Liberia Interest rate = 7%

*U.S. Interest rate = 2%

Spot exchange rate between U.S. Dollar and LRD is 0.5USD per LRD

Spot exchange rate after 1 year between U.S. Dollar and LRD is 0.47USD per LRD

If a person invest 1 LRD now and buy dollars of that, she will get 0.5 dollar. Dollar will earn 2% rate of interest which will make it 0.5 * 1.02 = 0.51 dollar after one year.

This 0.51 dollar in one year can be converted back to Liberian currency which will give 0.51 / 0.47 = 1.085 LRD which is actually 8.5% growth while the rate of interest in Liberia is 7%. Arbitrage gives 1.5% more in trading between currencies. So, there exist a arbitrage opportunity.

QUESTION: But the strategy is not an arbitrage? (because they are investing the LRD?)

Answer & Explanation Solved by verified expert
Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Become a Member

Other questions asked by students

Q

Assignment Question Sensation and Perception: Signal Detection Psychologists have always been interested in the relationship between physical stimuli...

Psychology
Q

What happens to all the Christmas candy on retail shelves on December 26? If the profit margin...

General Management
Q

lete the following dihybrid crosses Using the information provided in each problem and the steps...

Biology
Q

Which is the equation of a circle with diameter AB where A 5 4 and...

Geometry
Q

35 5 54 5 OA 7 meters 4 meters OC 3 meters 1 meters The...

Geometry
Q

se the matrices he total revenue for each booth Quantity Sold Booth 1 below to...

Calculus
Q

There are 60 students in a class 40 of them know how to swim 44...

Algebra
Q

Performance of services in which of the following fields fits the classification of a specified...

Accounting
Q

Lamonte Company reports the following budgeted December 31 adjusted trlal balance. he ending year balance...

Accounting
Q

\table[[Direct eaterials,3800],[Direct labor cost,$6,500

Accounting
Q

Wanda received form 1099 div reporting $50 in dividends for 2018 she had previously elected...

Accounting
Q

Alva Incorporated produces and sells B4T8, a component used in a multitude of consumer electronics....

Accounting