1. Complete the exchange rate matrix below. Round off your answers to the fourth
decimal place.
Currency Sold
$
1
$
Currency
Bought
Pound
1.5000
Euro
1.0600
Yen
0.0083
Pound
.6667
1
.7067
.0055
Euro
.9434
1.4151
1
.0078
Yen
120.4819
180.7229
127.7108
1
2. A European firm wants to buy yen and faces the following exchange rates:
Euro 0.0084/yen; Euro 0.9434/$ and $ 0.0083/Yen. Should the firm arbitrage through the
dollar to make the purchase? What is the purchase price in this case?
Ans. = € .0078, arbitrage through $
3. A British firm wants to buy Euros and faces the following rates: Pound 0.7000/Euro;
Pound 0.6667/$ and $1.0600/Euro. Should the firm arbitrage through the dollar to make
the purchase? What is the purchase price in this case?
Ans. = £ 0.7067, do not arbitrage through $
Find the premium/discount of the following four currencies in the
forward market.
Currency
Spot Rate
180 Day Forward Rate
Premium/Discount
0.27%
4. British Pound
$1.5000/Pound
$1.5020/pound
_______________
-1.60%
5. Euro
$1.00/Euro
$0.9920/Euro
______________
-2.5%
6. Canadian Dollar
$0.64000/C$
$0.6320/C$
________________
-6.8%
7. Mexican Peso
$0.1000/Peso
$0.0966/Peso
_______________
Find the dollar return (RET) for each currency in questions 4-7, given
the following annual interest rates.
Annual Interest Rate
6%
Dollar Return (REIT)
6.27%
_____________________
9. Euro
5.8%
4.2%
_____________________
10. Canada
6.7%
4.2%
_____________________
11. Mexico
10%
3.2%
_______________________
8. Britain (UK)
12. If the annual interest rate in the U.S. is 4.2%, where should a U.S. company invest its
cash for 180 days (i.e. where is the dollar return the highest compared to the U.S.)?
Ans. Britain
13. Do interest parity conditions exist between the U.S. and these other countries, if the
U.S. annual interest rate is 4.2%?
Country
Britain
Yes/No
No
________
Germany (Euro)
Yes
________
Canada
Yes
________
Mexico
No
________
14. A U.S. firm is scheduled to receive a C$ 1.6 million payment from a Canadian firm in
90 days and the 90 day forward rate is now $ 0.6000/C$. What should the U.S. firm do to
hedge the transaction? How many dollars will it receive in 90 days?
Ans. Sell C$ forward, receive $960,000
15. A U.S. firm must pay a Canadian firm C$ 1.0 million in 90 days. The spot rate today
is $0.6100/C$ and the 90 day forward rate is $0.6000/C$. What should the firm do to
hedge the transaction? How much will the transaction cost the U.S. firm in dollars?
Ans. Buy C$ forward, pay $600,000
16. Forecast what the exchange rate of the Canadian dollar will be in one year if the spot
rate now is $0.6000/C$ and the U.S. inflation rate is expected to be 2% and the Canadian
inflation rate 4%.
Ans. = $ 0.5885/C$
Using the exchange rate forecasting model described in Chapter 8 of the
textbook, predict what will happen to the franc/$ exchange rate if the
following variables change.
17. French interest rates increase.
Ans. $ depreciates
18. U.S. interest rates increase.
Ans. $ appreciates
19. U.S. inflation rates increase.
Ans. $ depreciates
20. U.S. inflation rates decline.
Ans. $ appreciates