1. A basket of goods costs $8,500 in the U.S. Exact same goods basket costs 7,200 in Europe. The exchange rate is .8144/$.

A. What is the over/undervaluation of the ?

B. What is the over/undervaluation of the $?

2. At the start of the year, the exchange rate was $1.35/. At the end of the year, the exchange rate is $1.43/. If U.S. inflation was 5% and European inflation was 3%, what has been the nominal and real change in the value of the Euro (versus the USD)?

3. You are going to convert $400 into C$. The bank has a C$1.12/$ bid and C$1.23/$ ask. How many total Canada dollars will you get when you sell the dollars?

4. A firm that issues LT debt and then effectively wants to transform its debt to ST debt can do so by entering into an interest rate swap in which it pays floating and receives fixed. T/F.

5. Given a home country and a foreign country, relative purchasing power parity(RPPP) suggests that: a foreign currency will depreciate if the current home inflation rate exceeds the foreign inflation rate.

6. According to the IFE, if interest rates are 7% in the U.S. and 4% in Japan, what must be the approximate expected change in the value of the dollar?

7. Interest rates are 7% in the U.S. Interest rates are 3% in Europe. You observe me investing in Europe at 3%. What can you infer about what I am expecting the to do over this next year?

8. Use the following quotes to answer the next ten questions:

Direct Market for /MXN Bids asks

Deutsche Banks quote: 12.33/MXN 12.39/MXN

Barclays quote: 12.31/MXN 12.36/MXN

CSFBs quote: 12.34/MXN 12.41/MXN

Citigroups quote: 12.38/MXN 12.44/MXN

Is there a locational arbitrage opportunity?

Which banks inventory of MXN will fall?

Which banks inventory of MXN will rise?

Which way will Barclays move their /MXN ask price?

9. Assume the following information:

Quoted Price

Spot rate of Mexican peso $.100/MXN

180 day forward rate of Mexican peso $.098/MXN

180 day Mexican interest rate (a period rate) 6%

180 day U.S. interest rate (also a period rate) 5%

Given this information, is covered interest arbitrage worthwhile for Mexican investors who have pesos to invest?

Assume that S = $1.50/. Risk-free interest rates in Europe are 5%. The forward rate of the euro displays a 2% premium relative to the spot rate. What $-denominated, risk-free percentage rate of return can a U.S. investor earn investing in Europe?

10. If the euros spot rate is $1.10, what should the one-year forward rate of the euro be?

11. If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it has a receivable of C$100000 in 90 days, it could hedge by: (indicate all that are possible): 1. obtaining a 90 day forward buy contract on C$. 2. Buying a 90-day put option on the C$. 3. Selling C$ 90 days from now at the spot rate. 4. Borrowing C$ now(from 90 days), exchanging C$ in $ now.

12. A good costs $862 in the U.S. Same good costs NZ$ 1,700. The exchange rate is $.46/NZ$.

What is the over/undervaluation of the NZ$?

What is the over/undervaluation of the $?

13. If U.S. inflation is 3% and U.K. inflation is 6%, what should be the approximate change in the value of the pound, according to relative PPP?

14. At the start of the year, the exchange rate is .50/$. At the end of the year, the exchange rate is .45/$. If U.S. inflation was 20%, and European inflation was 4%, what has been the nominal and real change in the value of the dollar?

15. Assume that the spot exchange rate of the Singapore dollar is $.70/S$. The one year interest rate is 11 percent in the United States and 7 percent in Singapore. What is the expected spot rate in one year according to the IFE?

16. Everything else equal, call and put option premiums will be lower for currencies with lower volatility. T/F

17. The exchange rate at the start if the year was $1.5500/ . The percentage change in the value of the U.S. dollar over this time period has been?

18. If one US dollar is worth 8 pesos and 12 pesos is worth 110 and 30 is worth 3 Vebezuelan Bolivars, what is the VEB/USD cross exchange rate?

19. Reducing international trade restrictions is likely to decrease international competition in the production of goods and services. T/F

20. If U.S inflation suddenly decreased while European inflation stayed the same, there would be a decreased U.S. demand for euros and an increased supply of euros for sale.