Economics for Global Manager

posted by .

If the current exchange rate is US$1 equals € .70, how much did you win in US dollars?
Suppose that the interest rate in Irish banks is 2% for a one year CD. In the USA, the rate is 4% for a one year CD. If you left your winnings in Ireland, how many euros would you have in a year? If you had taken your winnings back to the USA, how many dollars would you have?
Suppose when you cashed in your CD in Ireland a year from now, the exchange rate had changed from US$1 to € .70 to US$1 to € .65. How much would your Irish bank account be worth in US dollars at that point? Would you have been better off leaving your winnings in Ireland or bringing them home to the USA?
Explain how banks and individuals can use “covered interest arbitrage” to protect themselves when they make international financial investments.
Using the theory of purchasing power parity, explain how inflation impacts exchange rates. Based on the theory of purchasing power parity, what can we infer about the difference in inflation between Ireland and the USA during the year your lottery winnings were invested?

  • Economics for Global Manager -

    a. since 1 dollar = .70 euros
    .70 euros = 1 dollar
    Dividing both sides by .70,
    then 1 euro = 1/.70 dollar
    1,000,000 euros = 1,000.000 (1/.70) dollars
    = $1,428,571.43
    b. Since the interest rate is 2% (in Irish bank), 1,000,000 euros after one year =
    1,000,000 + 2%(1,000,000) or 1,000,000 (1 + .02) = 1,000,000 (1.02)
    = 1,020,000 euros
    c. The 1,020,000 euros converted to US dollars at $1 = .70 euros
    1,020,000 euros = 1,020,000/.70 dollars
    = $1,457,142.86
    d. At $1 = .65 euro
    1,020,000 euros - 1,020,000/.65 dollars
    = $1,569,230.77
    e. 1,000,000 euros which is equivalent to $1,428,571.43, invested in US bank at 4% is
    = $1,428,571.43 + 4%($1,428,571.43)
    = $1,428,571.43 (1 + 4%)
    = $1,428,571.43 (1 +.04)
    = $1,428, 571.43 (1.04)
    = $1,485,714.29
    This amount is less than the $1,569,230.77 value of the money after one year if left in Irish bank.

  • Economics for Global Manager -

    Explain how banks and individuals can use “covered interest arbitrage” to protect themselves when they make international financial investments.

  • Economics for Global Manager -

    Explain how banks and individuals can use “covered interest arbitrage” to protect themselves when they make international financial investments.

Respond to this Question

First Name
School Subject
Your Answer

Similar Questions

  1. econ (economyst please help)

    I got this long question i am not sure how to do. The current dollar-pound exchange rate is $2 per pound. A U.S. basket that costs $100 would cost $120 in the United Kingdom. For the next year, the Fed is predicted to keep U.S. inflation …
  2. FINANCE

    Answer both questions A).The treasurer of a German firm has €5 million to invest for three months. The annual interest rate in the Germany is 4 percent: the interest rate in the United Kingdom is 2 percent. The spot rate of exchange …
  3. Economics

    The nominal interest rate is 12 percent per year in Canada and 8 percent per year in the United States. Suppose that the real interest rates are equalized in the two countries and that purchasing-power parity holds. What can you infer …
  4. Economics

    The formula given was: (real rate of interest) = (nominal rate of interest) - (expected rate of inflation) A chartered bank offers a one-year loan at "3 points above prime." Prime is 4 per cent. a) What is the nominal interest rate?
  5. fin 300

    4. Assume that bank has assets located in Germany worth €150 million earning an average of 8 percent. It also holds €100 in liabilities and pays an average of 6 percent per year. The current sot rate is €1.50 for $1. If the exchange …
  6. VBS 2010

    Write a Web program to calculate the discount rate and interest rate for a bond. If a bond is purchased for n dollars and sold one year later for m dollars, then the discount rate is m-2/m and the interest rate is m-n/n, where each …
  7. FINANCE

    5. Forecasting Interest Rates Assume the current interest rate on a one-year Treasury bond (1R1) is 5.00 percent, the current rate on a two-year Treasury bond (1R2) is 5.75 percent, and the current rate on a three-year Treasury bond …
  8. FINANCE

    7. Forecasting interest rates Assume the current interest rate on a one-year Treasury bond (1R1) is 5.50 percent, the current rate on a two-year Treasury bond (1R2) is 5.95 percent, and the current rate on a three-year Treasury bond …
  9. Econ

    The 1-year interest rate on Swiss francs is 5 percent and the dollar interest rate is 8 percent. (A) if the current $/SF spot rate is $0.60, what would you expect the spot rate to be in 1 year. (B) Suppose US policy changes and leads …
  10. Algebra

    Phyllis invested 67000 dollars, split between two different accounts. The money in the first account earns simple interest at the rate of 4 percent per year. The money in the second account earns simple interest at the rate of 6 percent …

More Similar Questions