International Monetary Econ the Rates Obtained Were Term Paper

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International Monetary Econ

The rates obtained were as of market close on November 25, 2011. Historical rates are difficult to obtain online so this approach is more realistic. The spot rate for USD/JPY is 77.13 and the spot rate for USD/GBP is 0.64399 (Oanda.com, 2011).

The six-month forward rate for USD-JPY is 75.39 and for USD-GBP is 0.6279. The 6-month T-bill rates are for the U.S. 0.05%; for the UK 0.53% and for Japan 0.0%.

If covered interest rate parity holds, then there should be no arbitrage opportunity in trading forwards of these currencies. So for USD-GBP we have the following:

(1 + r£)/(1+r$) = (£/$f)/(£/$s)

For this relationship, interest rate parity does not hold. For the USD-JPY relationship we have the following:

r¥)/(1+r$) = (¥/$f)/( ¥/$s)

/ 1.0005 = 75.39/77.13

0.999 = 0.977

For this relationship, covered interest rate parity also does not hold. If I have $10,000, my rate of return on U.S. T-bills (assuming this means 6-month) is going to be 0.

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05%, or $2.50.

If I buy six-month JPY, I will first convert to yen, giving me ¥771,300. This will earn nothing, so in six months I will also have ¥771,300. Using a six-month forward, this would be worth $10,230.80, as follows:

771,300/75.39

If I buy six-month GBP bonds I will start with £6640 and in six-month's time I will have £6457. Using the six-month forward rate this will convert back to $10,283.59.

3. With the JPY scenario, $10,000 would start with ¥771,300. This would be worth the same thing in six months. This would then convert back to USD as $10,016.88:

¥771,300 / 77 = $10,016.88

With the GPB scenario, $10,000 would start with £6640. In six months this will be worth £6457. This would be converted back to $10,249.21:

£6457 * 1.587 = $10,249.21

In both of these scenarios, the covered strategy is the more.....

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