# 1 Suppose that the US dollarpound exchange rate equals t.pdf

20 de Mar de 2023
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### 1 Suppose that the US dollarpound exchange rate equals t.pdf

• 1. 1. Suppose that the U.S. dollar-pound exchange rate equals to \$1.30/pound, while the 3-month forward rate is \$1.40/pound. The yield on 1-year U.S. and U.K. Treasury bills are 8% and 12%, respectively: a. Calculate the 3-month covered interest differential using the exact formula (f = (i-i*)/(1+ i*)). Are there net gains to be made? b. Suppose that a U.S. firm faces transactions costs that further reduce gains from investing abroad by 700 basis points. Would there now be net gains from engaging in covered interest arbitrage? c. Referring to part a. above, suppose the interest income is taxed at 40% in each country, but any capital gains from investing abroad are taxed at 20%. Are there net gains to be made? (Do not include the transactions costs from part b above.) d. With reference to part a., show where the return lies relative to the CIP line using the approx. Explain how arbitrage in money markets and foreign markets will return back to the CIP line.