problems chapter 6-7 international parity conditions.pptx

7/27/2019 Problems Chapter 6-7 International Parity Conditions.pptx

1/12

Question 1

If expected inflation is 7.55 percent and the requiredreal return is 5.25 percent, what will the nominal

interest rate be according to the Fischer effect?


2/12

Question 2

From base price levels of 100 in 2000, Japanese and USprice levels in 2003 stood at 112.55 and 116.75,

respectively. If the 2000 USD/ exchange rate was

USD 0.007692, what should the exchange rate be in

2003?


3/12

Question 3

In early 1996, the short-term interest rate in Francewas 3.7%, and forecast French inflation was 1.8%. At

the same time, the short-term German interest rate was

2.6% and forecast German inflation was 1.6%. Based on

those figures, what were the real interest rates in

France and Germany?


4/12

Question 4

In July, the one-year interest rate is 12% on GBP and 9%on USD. If the current exchange rate is USD 1.63/GBP,

what is the expected future exchange rate in one year

from now?

Suppose a change in expectation regarding future US

inflation causes the expected future spot rate todecline to USD 1.52/GBP. What should happen to the US

interest rate?


5/12

Question 5

Chase Econometrics has just published projected inflation

rates for United States and Germany for the next five

years. US inflation is expected to be 10 percent per year,

and Germand inflation is expected to be 4 percent per

year. If the current exchange rate is USD 0.95/, what

should the exchange rates for the next five years be?

Suppose the US inflation over the next five years turns

out to be 3.2%, German inflation averages 1.5%, and the

exchange in five years is USD 0.99/. What has happened tothe real value of the euro over this five year period?


6/12

Question 6

During 1995, the Mexican peso exchange rate rose from Mex

$ 5.33/USD ti Mex $ 7.64/USD. At the same time, US

inflation was approximately 3% in contrast to Mexican

inflaction of about 48.7%.

By how much did the nominal value of the peso change

during 1995?

By how much did the nominal value of the peso change over

this period?


7/12

Question 7

Suppose 3-year deposit rate on Eurodollars and Eurofrancs

(Swiss) are 12 percent and 7 percent, respectively. If the

current spot rate for the Swiss fran is USD 0.3985, what

is the spot rate implied by these interest rates for the

franc three year from now?


8/12

Question 8

Assuming the following quotes, calculate how a market

trader at Citybank with $ 1 million can make an arbitrage

profit. Explain your calculations.

Citibank quotes U.S. dollar per pound: $1.71/ National Westimenter quotes euro per pound: 1.77/

Deutsche Bank quotes dollar per euro: $1.07/


9/12

Question 9

Assuming the following quotes, calculate how a market

trader at Citybank with $ 5 million can make an arbitrage

profit. Explain your calculations.

Citibank quotes U.S. dollar per pound: $1.94/ National Westimenter quotes euro per pound: 2.02/

Deutsche Bank quotes dollar per euro: $1.22/


10/12

Question 10

Use the data in the table below to complete the calculation of the implied PPP

value fo the currency against the US dollar and the calculation as to whether that

currency is undervalued or overvalued against the US dollar. Explain your

calculations.

Countr y/Currency Big Mag

Prices in

Local

Currency

Current

Exchange

Rate(Direct

Quotat ion)

Big Mag

Prices in

US Dollars

Implied

PPP of the

Dollar

Local

Currency

Under)/Over

Valuation

United States (dollar) 4.50

Argentina (Peso) 5.75 3.25

Brazil (Reals) 9.50 4.5

Chile (Peso) 1750.00 675.00

Mexico (Peso) 32.00 15.8


11/12

Question 11

Lehman is a foreign exchange dealer for a bank in New York.He has $ 10 million (or its Swiss franc equivalent) for ashort term money market investment and wonders if he shouldinvest in US dollars for the 3 months or make an arbitrageinvestment in the Swiss franc. He faces the rates show in thetable:

Spot exchange rate SFr 1.35/$

3-month Swiss franc forward rate SFr 1.33/$

USD interest rate 5% per year

Swiss franc interest rate 4% per year

a) Where do you recommend Lehman to invest, and why?

b) What is Lehmans rate of return, on annual basis, on thisinvestment?


12/12

Question 12

Use the cross-rate table shown below to determine the

following rates:

a) US dollars per Japanese Yen

b) Euros per US dollar

c) Euros per Japanese Yen

d) US dollars per Canadian dollar

e) US dollars per Australian dollar

f) US dollars per British poundg) Swiss francs per US dollar

problems chapter 6-7 international parity conditions.pptx

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