Consider a Dutch investor with 1,000 euros to place in a bank deposit in either the Netherlands (home country) or Great Britain (foreign country). The (one-year) interest rate on bank deposits is 2.00% in Britain and 4.04% in the Netherlands. The (one-year) forward euro–pound exchange rate is 1.575 euros per pound and the spot rate is 1.5 euros per pound. Answer the following questions, using the exact equations for UIP and CIP as necessary. b. What is the (riskless) euro-denominated return on British deposits for this investor using forward cover? c. Is there an arbitrage opportunity here? Explain why or why not. Is this an equilibrium in the forward exchange rate market? d. If the spot rate and interest rates are as stated previously, what should be the equilibrium forward rate, according to CIP? e. Suppose the forward rate takes the value given by your answer to (d). Calculate the forward premium on the British pound for the Dutch investor (where exchange rates are in euros per pound). Is it positive or negative? Why do investors require this premium/discount in equilibrium? f. If UIP holds, what is the expected depreciation of the euro against the pound over one year? g. Based on your answer to (f), what is the expected euro–pound exchange rate one year ahead?

Today, the annual interest rate on bank deposits is 8.15% in New York and 3% in Paris, the spot exchange rate is 1.2 US dollars per euro, and the one-year forward exchange rate is 1.236 US dollars per euro. Emily plans to deposit 1,000 US dollars in either New York or Paris for one year. Answer the following questions, using the exact equations for the UIP/CIP.(a). Where should Emily deposit her funds? Given today's spot exchange rate and interest rates, what is the equilibrium forward rate, if covered interest parity (CIP) holds? Report the intermediate steps. [3 marks](b). Suppose the forward rate takes the value given by your answer to question (a). If UIP also holds, is the US dollar expected to appreciate or depreciate against the euro over one year? By how much? Report the intermediate steps.  [3 marks]

Suppose you observe a spot exchange rate of $2.00/£. If interest rates are 5 percent per annum in the U.S. and 2 percent per annum in the U.K., what is the no-arbitrage one-year forward rate?Group of answer choices£1.9429/$$1.9429/££2.0588/$$2.0588/£

Suppose that the one-year interest rate is 5.0 percent in the United States. The spot exchange rate is $1.20/€, and the one-year forward exchange rate is $1.16/€. What must the one-year interest rate be in the euro zone to avoid arbitrage opportunities?Group of answer choices5.0%6.09%none of the options8.62%

The annual nominal interest rate is 6% in the euro area and 4% in New Zealand. Suppose that there is no change in the expected future exchange rates, and the UIP holds initially.If the spot exchange rate depreciates today, _______.[Hint: see page 4 of lecture 4A,  question 4 of In-class Quiz - Week 5B]Group of answer choicesthe foreign return in terms of NZD rises.the foreign return in terms of NZD falls.the domestic return falls.the domestic return rises.

Assume that an U.S. bank has assets located in London that are worth £200 million on which it earns an average of 10 percent per year. The bank has £250 million in liabilities on which it pays an average of 6 percent per year. The current spot exchange rate is £1.25/$ and  the exchange rate at the end of the year is £2.00/$. Which of the following is FALSE?A.The bank is currently holding a net short position the foreign assets.B.At the end of the year, the bank would have an increase in its net interest income from the foreign assets and liabilities.C.The bank is exposed to interest rate risk if the duration of the foreign assets differs from the duration of the foreign liabilities.D.At the end of the year, the bank would have a reduction in its net interest income from the foreign assets and liabilities.E.The pound has depreciates against the dollar.