1. Calculate the forward discount (or premium) for the following spot and three-month forward rates:

(a) S = $2/1 and F = $2.01/

(b) S = $2/1 and F = $1.96/1

Solved:

(a) (FR - SR) / SR

= (2.01 - 2.00) / 2.00

= 0.5%

0.5% * (360 / 90) = 2%.

(b) (FR - SR) / SR

= (1.96 - 2.00) / 2.00

= - 0.02 or 2% forward discount over three month.

Or, we can say that, (-2%) * (360 / 90) = -8%.

That means 8% annual forward discount.

2.What would happen to the dollar/peso exchange rate if the interest rate increased in the US but remained unchanged in Mexico? Explain using the graph.

3. Find out the cross rate between US$ and British Pound Sterling() if the spot rate between British Pound Sterling and Japanese Yen is 121/, and the spot rate between US$ and Japanese Yen is 85/$.

4. What is the percentage change in the $/ exchange rate if the price for one unit of corn in the US is $10 in 2003 and $12 in 2004, and in the UK, ?15 in 2003 and ?20 in 2004?

5. A television costs 600 Canadian dollars (CAD) in Canada and 500 US dollars (USD) in the US. What will be the exchange rate between the Canadian dollar and the US dollar, according to the absolute PPP theory?