Answer to Question #222672 in Financial Math for Collins

Question

a) The value of the US Dollar today is GHS 6.1. Yesterday, the value of the US dollar was

GHS 5.91. The Ghana Cedi ____ by ____%.

b) Assuming that existing U.S. one year interest rate is 8% and the Canadian one-year

interest rate is 9%. Also assume that interest rate parity exists. Should the forward rate

of the Canadian dollar exhibit a discount or a premium? If U.S. investors attempt

covered interest arbitrage, what will be their return? If Canadian investors attempt

covered interest arbitrage what will be their return?

Answer 1

a. We take the current exchange minus the previous one which is 6.1− 5.91= 0.91.To get percentage we take the difference then divide by the previous exchange rate and multiply by 100%

$=$ $\frac {0.91}{5.91}×100$ $=$ 3.2%

b. The Canadian dollars forward rate should exhibit a discount because its interest rate exceeds the US interest rate.

c.U.S investors would earn a return of 8% using covered interest arbitrage , the same as they would earn in the U.S

d.Canadian investors would earn a return of 9% using covered arbitrage, the same as they would earn in Canada