1. A spot trade in FX is a trade made today and settled two days in the future. A forward trade is an agreement made today to exchange currencies at a future date. Using the current spot rate of USD/CAD =1.3317 and an assumed 6-month forward rate of USD/CAD =1.3025, which of the following statements are true?

Select one:

a. CAD is appreciating against USD

b. CAD is selling at a premium in the forward market

c. USD is selling at a forward discount of 4.39%

d. All of the above are true

e. Only a. and b. above are true

2. Relative Purchasing Power Parity shows the relationship between exchange rates and inflation. The formula is E(S_t) = S₀[1+(h_FC-h_CDN)]^t where h refers to expected inflation in both the foreign country (FC) and Canada. The spot exchange rate between the Canadian dollar and the Thai Baht is CAD/THB = 23.3514. If inflation in Canada is expected to be 1.5% per year for the next three years and inflation in Thailand is expected to be 3% per year over the same time period, which of the following statements are true?

Select one:

a. You would expect the THB to depreciate against CAD

b. The expected spot exchange rate in three years is CAD/THB = 24.4181

c. If you expect to need Baht in three years time and if you could buy a three-year forward contract at an exchange rate of CAD/THB = 24.0000, based on the data we have we should enter into the forward contract

d. All of the above are true

e. Only a. and b. above are true

3. Covered interest arbitrage is a well-known strategy for capitalizing on mispricing in the market. The strategy involves borrowing money today in ones home currency, selling the domestic currency in the spot market in exchange for a foreign currency, investing the foreign currency abroad and simultaneously selling the foreign currency in the forward market to end up with domestic currency. Assume that you have the following information: Spot AUD/CAD = 0.9367; 1 Year Forward AUD/CAD = 0.9200; One-year risk- free rate in Canada = 2%; One year risk-free rate in Australia = 2.5%. For simplicity, assume that you can both borrow and lend at the risk-free rate. Assume also that if you undertake the strategy you will borrow $100,000 CAD. Which of the following statements are true?

Select one:

a. CAD $100,000 is equivalent to AUD $106,755 at the spot rate

b. You should have AUD $109,423.88 after one-year if invested at the Australian risk-free rate

c. After converting back to CAD at the one-year forward rate and paying the interest on the Canadian dollar loan, you will have made a profit of CAD $1,330

d. All of the above are true

4. Continue with the data from the question above. Using the formula for Interest rate parity,

F₁=S₀(1+R_{Quote Currency})/(1+R_{Base Currency}),

what one-year Forward Rate should prevail in the market?

Select one:

a. AUD/CAD = 0.9321

b. AUD/CAD = 0.9280

c. AUD/CAD = 0.9245

d. AUD/CAD = 0.9200

e. AUD/CAD = 0.9176

e. Only a. and b. above are true