1. Assume the following information:

U.S. deposit rate for 1 year	=	11%
U.S. borrowing rate for 1 year	=	12%
Swiss deposit rate for 1 year	=	8%
Swiss borrowing rate for 1 year	=	10%
Swiss forward rate for 1 year	=	$.40
Swiss franc spot rate	=	$.39

Also assume that a U.S. exporter denominates its Swiss exports in Swiss francs and expects to receive SF600,000 in 1 year.

Using the information above, what will be the approximate value of these exports in 1 year in U.S. dollars given that the firm executes a forward hedge?

$234,000

$240,000

$238,584

$236,127

2. Frank is an option speculator. He anticipates the Danish kroner will appreciate from its current level of $.19 to $.21. Currently, kroner call options are available with an exercise price of $.18 and a premium of $.04. Should Frank attempt to buy this option? If the future spot rate of the Danish kroner is indeed $.21, what is his profit or loss per unit?

yes; $0.03.

no; -$0.04.

no; -0.01.

yes; $0.01.

3. Calculate your profit, in dollars, of the following trade:

On 1/3 you short call options on 100,000 at a strike of $1.25 when the exchange rate is $1.26/. These options were priced at $0.04 per pound covered. On 6/15 these options mature and the exchange rate is $1.24/.

$3,000

$4,000

-$2,000

-$3,000

4. Suppose annual inflation rates in the U.S. and Mexico are expected to be 6% and 80%, respectively, over the next several years. If the current spot rate for the Mexican peso is $.005, then the best estimate of the peso's spot value in 3 years is

$.00276

$.00102

$.00321

$.01190

5. You see the following fictitious exchange rates:

1.724/

3.581/

If all three of these currencies float, what is the arbitrage-free spot rate of one denominated in ?

2.077

0.481

0.539

1.857