1. Assume the following information:

Current spot rate of Australian dollar	=	$.86
Forecasted spot rate of Australian dollar 1 year from now	=	$.88
1-year forward rate of Australian dollar	=	$.93
Annual interest rate for Australian dollar deposit	=	4%
Annual interest rate in the U.S.	=	2%

What is your percentage return from covered interest arbitrage with $550,000 for one year?

2.The inflation rate in the U.S. is 3%, while the inflation rate in Japan is 1.5%. The current exchange rate is $1 equal to 105 Japanese yen. If purchasing power parity condition is existed, what is the new exchange rate for the yen?

3. The interest rate in the U.K. is 2%, while the interest rate in the U.S. is 2.5%. The spot rate for the British pound is $1.25. According to the international Fisher effect (IFE), what is new level of the British pound?

4. Bronco Co. is a U.S.-based MNC that has subsidiaries in Spain and Germany. Both subsidiaries frequently remit their earnings back to the parent company. The Spain subsidiary generated a net outflow of 5,000,000 this year, while the German subsidiary generated a net inflow of 4,500,000. What is the net inflow or outflow as measured in U.S. dollars this year? The exchange rate for the euro is $1.159.

5. If one-year nominal interest rate in the U.S. is 3%, while the one-year nominal interest rate in Australia is 5%. The spot rate of the Australian dollar is $.96. Interest Parity is held. You will need 5 million Australian dollars in one year. Today, you purchase a one-year forward contract in Australian dollars. How many U.S. dollars will you need in one year to fulfill your forward contract?

6. Today, the one-year U.S. interest rate is 2%, while the one-year interest rate in Mexico is 8%. The spot rate of the Mexico peso (MXP) is $.06 The one-year forward rate of the MXP exhibits a 10% discount. Determine the yield (percentage return on investment) to an investor from Mexico who engages in covered interest arbitrage.

7. Current one-year interest rates in Europe is 4 percent, while one-year interest rates in the U.S. is 2 percent. You convert $200,000 to euros and invests them in France. One year later, you convert the euros back to dollars. The current spot rate of the euro is $1.20.

a. According to the IFE, what should the spot rate of the euro in one year be? b. If the spot rate of the euro in one year is $1.12, what is your percentage return from your investment? c. If the spot rate of the euro in one year is $1.31, what is your percentage return from your investment? d. What must the spot rate of the euro be in one year for your strategy to be successful?