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| 1 | |
Suppose interest rates in the U.S. are 5% when the spot exchange rate is $0.75 = €1 and the interest rate in France is 8% per year. What must the one-year forward exchange rate be? |
| | A) | $0.7292 = €1 |
| | B) | $0.75 = €1 |
| | C) | $0.81 = €1 |
| | D) | $0.7714 = €1 |
| | E) | $1.2963 = €1 |
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| 2 | |
Suppose that domestic inflation is 3%; inflation in ₣ is 6% and the spot exchange rate is ₣1 = $2. What is your estimate of the exchange rate expected to prevail in 3 years? |
| | A) | ₣1 = $2.1855 |
| | B) | ₣1 = $2.00 |
| | C) | ₣1 = $1.8349 |
| | D) | ₣1 = $1.9434 |
| | E) | None of the above |
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| 3 | |
Suppose that the spot exchange rate for Japanese yen is ¥122/$ and that the one year forward exchange rate for Japanese yen is ¥130/$. The one-year interest rate is 5% in the U.S. What's the interest rate in Japan? |
| | A) | 11.89% |
| | B) | 6.56% |
| | C) | 3.28% |
| | D) | 1.67% |
| | E) | None of the above |
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| 4 | |
Consider the following exchange rate quotation from Wall Street Journal
| | U.S.$ equiv. | Currency per U.S. $ | | Friday | Thursday | Friday | Thursday | | Britain (Pound) | 1.5760 | 1.5720 | 0.6345 | 0.6361 | | 1 Month Forward | 1.5726 | 1.5686 | 0.6359 | 0.6375 | | 3 Months Forward | 1.5661 | 1.5621 | 0.6385 | 0.6402 | | 6 Months Forward | 1.5564 | 1.5523 | 0.6425 | 0.6442 |
Judging by the exchange rates quoted above, which country has the higher rate of inflation? |
| | A) | Britain |
| | B) | The United States |
| | C) | There is not enough information to say. |
| | D) | All of the above |
| | E) | None of the above |
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| 5 | |
Suppose you observe the following exchange rates: S($/€) = 0.85 (i.e. €1 = $.85) The one-year forward rate is F1($/€) = 0.935 (i.e. €1 = $.935) The risk-free interest rate in the U.S. is 5% and in Germany it is 2%. How can a dollar-based investor make money? |
| | A) | Borrow dollars in the U.S., exchange for euros, invest in Germany, enter into a on-year forward contract; in one year, translate the euros back into dollars at the forward rate. |
| | B) | Borrow euros, translate into dollars at the spot, invest in the U.S. at 5% for one year. At the end of the year, translate part of your dollar investment back into euros at the forward rate to repay your euro debt. |
| | C) | There are no profitable arbitrage opportunities. |
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| 6 | |
Suppose you observe the following exchange rates: S($/€) = 0.85 (i.e. €1 = $.85) The one-year forward rate is F1($/€) = 0.935 (i.e. €1 = $.935) The risk-free interest rate in the U.S. is 5% and in Germany it is 2%. How can a euro-based investor make money? |
| | A) | Borrow $1,000 in the U.S., exchange for euros, invest in Germany, enter into a forward contract; in one year, exchange €1,123 back into $1,050 at the forward rate to repay your dollar borrowing. Keep €77. Buy beer. |
| | B) | Borrow €1,000, translate into dollars at the spot, invest in the U.S. at 5% for one year. At the end of the year, translate your dollar investment back into euros at the forward rate to repay your euro debt. |
| | C) | There are no profitable arbitrage opportunities. |
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| 7 | |
Purchasing power parity states that: |
| | A) | The cost of a haircut in Columbia Missouri should be exactly the same as the cost in Hong Kong |
| | B) | Rates of inflation must be the same everywhere |
| | C) | Spot exchange rates are the best predictor of expected inflation rates. |
| | D) | The cost of a Big Mac sandwich should be reflected in the cost of two all-beef patties, special sauce, lettuce, cheese, pickles, onions and a sesame seed bun. |
| | E) | None of the above. |
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| 8 | |
Due to the integrated nature of their capital markets, investor in both the U.S. and Great Britain require the same expected real interest rate of 3 percent. The expected annual inflation in the U.S. is 2 percent and in the U.K. expected annual inflation is 5%. The spot exchange rate is currently £1.00 = $1.80. Calculate the nominal interest rates in Britain and the U.S. assuming the Fisher effect holds. |
| | A) | 3% in both countries |
| | B) | 8.15% in Britain and 5.06% in the U.S. |
| | C) | 1% in the U.S. and 2% in the U.K. |
| | D) | 8% in the U.S. and 5% in the U.K. |
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| 9 | |
Due to the integrated nature of their capital markets, investor in both the U.S. and Great Britain require the same real interest rate of 3 percent. The expected annual inflation in the U.S. is 2 percent and in the U.K. expected annual inflation is 5%. The spot exchange rate is currently £1.00 = $1.80. Calculate the expected spot dollar-pound exchange rate expected to prevail in one year, assuming the Fisher effect holds. |
| | A) | £1.00 = $1.80 |
| | B) | £1.03 = $1.8540 |
| | C) | £1.00 = $1.8540 |
| | D) | £1.00 = $1.7486 |
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| 10 | |
Due to the integrated nature of their capital markets, investor in both the U.S. and Great Britain require the same expected real interest rate of 3 percent. The expected annual inflation in the U.S. is 2 percent and in the U.K. expected annual inflation is 5%. The spot exchange rate is currently £1.00 = $1.80. Can you infer the forward dollar-pound exchange rate for one-year maturity? |
| | A) | £1.00 = $1.75 |
| | B) | £1.00 = $1.7486 |
| | C) | £1.03 = $1.8540 |
| | D) | £1.00 = $1.85 |
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