Ch 4 Basics 0

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					                                    Chapter 4 Basics

1. According to purchasing power parity, if a Big Mac costs £1.99 in the UK and $3.41 in
   the USA, what should be the exchange rate of dollars to pounds?


2. If a Big Mac costs £1.99 in the UK and $3.41 in the USA, and the actual exchange rate is
   £0.50 at that time, does PPP suggest the pound is overvalued or undervalued? By how
   much (what %)?


3. If the USA has annual inflation of 5%, Switzerland has annual inflation of 3%, and the
   spot rate is SFr 1 = $0.75, what does PPP suggest the spot rate should be in three years?


4. Use the monetary approach to predict the U.S. inflation rate, given the following
   forecasts: money-supply growth = 5%, real GNP growth = 2%, and the velocity of money
   will fall 0.5%.


5. According to the Fisher Effect, if the UK has inflation of 7%, and the UK has a nominal
   rate of return = 9%, what should the UK real rate be?


6. If the USA has inflation of 4% and the UK has inflation of 7%, what should the
   approximate interest rate differential be?


7. According to the Fisher Effect, if the USA has inflation of 4%, the UK has inflation of
   7%, and the UK has a nominal rate of return = 9%, what should the U.S. nominal rate be?


8. If the one-year interest rate is 2% on Swiss francs and 7% on U.S. dollars, and the
   exchange rate is currently SFr 1 = $0.91, what does the International Fisher Effect
   suggest the spot rate will be in one year?


9. If the one-year interest rate is 2% on Swiss francs and 7% on U.S. dollars, the exchange
   rate is currently SFr 1 = $0.91, and the expected spot rate in one year is SFr 1 = $1.00,
   what does the International Fisher Effect suggest the U.S. interest rate will become?
10. If the spot rate is $1.95/£ and the one-year forward rate is $1.87/£, Does this imply a
    forward premium or forward discount on pounds? What is the amount (%)?


11. In London, interest paid on pounds sterling is 12%. If the spot rate is $1.95/£ and the one-
    year forward rate is $1.87/£, what is the covered yield on pounds?


12. Is there a covered interest differential?


13. An arbitrageur sees an opportunity for a covered interest arbitrage. In London, interest
    paid on pounds sterling is 12%, while in New York, interest paid on dollars is 7%. If the
    spot rate is $1.95/£ and the one-year forward rate is $1.87/£, how much profit will the
    arbitrageur make if he can borrow $1,000,000 to put into a covered interest arbitrage?
    (NOTE: Assume the spread on borrowing & lending rates is zero and the bid-ask spread
    is zero).




14. What is the 90-day forward rate if U.S. interest is 10%, Japanese interest is 7%, and the
    spot rate is $0.003800/¥? Use a 360-day year and assume interest rate parity (i.e. there are
    no arbitrage opportunities).


15. What is the annualized (%) premium?


16. If the interest rate on dollars is 6%, the interest rate on euros is 5%, and the spot rate is
    $0.90/ €, what is the implied value of the euro in five years?

				
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posted:11/9/2012
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