1. In January, 2021 (when SF3=$1) it was expected that by the end of 2021 the price level in the U.S. would have risen by 10% and in Switzerland by 5%. The real rate of interest in both countries is 4%.

a. Project the expected SF/$ at the end of 2021

b. Estimate the nominal interest rates in each country which makes it possible for investments in each country to earn their real rate of interest.

c. Estimate the current one-year forward rate of SF/$.

d. Compare your estimate of the current forward rate in part c with your estimate of the expected future spot rate in a. Explain.

2. On January 10th, Tesla agrees to sell parts worth 7 million euro to Germany. The parts will be delivered om March 4th. Tesla decides to hedge its euro receivables by entering into IMM futures contracts. The spot rate is $1.8947/euro and the March futures price is $1.9002/euro. March futures contracts mature in third Wednesday of March.

a. Calculate the number of futures contracts that Tesla must sell to offset its euro exchange risk on the parts contracts. Assume a single futures contract for euro is 125000.

b. On March 4th, the spot rate turns to be $2.2500/euro, while the March futures price is $2.2600/euro. Calculate Teslas net dollar gain or loss on its futures position. How much is the total cost of this hedge for Tesla. Do you think the hedge wan effective? Explain.

3. During 1995, the Mexican peso exchange rate rose from peso 5.33/$ to peso 7.64/$. At the same time. U.S. inflation was approximately 3% in contrast to Mexican inflation of about 48.7%.

a. By how much did the real value of the peso change over this period?

4. Apple Corporation must pay its Japanese supplier 125 million yen in three months. It is thinking of buying 20-yen call options (contract size is 6.25 million yen) at a strike price of $0.00800 in order to protect against the risk of rising yen. The premium is 0.015 cents per yen. The current spot rate is I yen = $0.007823.

a. Calculate what Apple would gain or lose on the option position if yen settled in 90 days as low as $0.007500, or as most likely as $0.007900, or as high as $0.008400.

b. What is Apples break-even future spot price on the option contract?