1. Assume the current spot rate is Can$1.2803 and the one-year forward rate is Can$1.2745. Also assume the nominal risk-free rate in Canada is 4.8 percent while it is 4.2 percent in the U.S. Using covered interest arbitrage, you can earn a profit of ___ for every $1 invested over the next year.

Multiple Choice

• $.0088

• $.0108

• $.0840

• $.0163

• $.0040

2. Assume $1 will buy Can$1.2803 while $1.2195 will buy 1. What is the Can$/ exchange rate?

Multiple Choice

• Can$1.0499 = 1

• Can$.9525 = 1

• Can$1.3624 = 1

• Can$.9709 = 1

• Can$1.5613 = 1

3. Assume the current spot rate for the Norwegian krone is $1 = NKr7.93, the expected inflation rate in Norway is 2.4 percent while it is 2.6 percent in the U.S. Also assume a risk-free asset in the U.S. is yielding 4.5 percent. What real rate of return should you expect on a risk-free Norwegian security?

Multiple Choice

• 2.1 percent

• 1.9 percent

• 4.7 percent

• 4.3 percent

• 2.4 percent

4. The camera you want to buy costs $399 in the U.S. If absolute purchasing power parity exists, the identical camera will cost _____ in Australia if the exchange rate is A$1 = $.7752.

Multiple Choice

• A$393.23

• A$506.67

• A$514.71

• A$435.09

• A$309.30