1) Jetta production cost in 2002 and 2003 was 12,000 Euro per Jetta. Jettas were sold in US at $13,000 in 2002 and 2003. Forward hedge exchange rate was 1 $/Euro in 2003. The market exchange rate was 1.15 $/Euro (i.e. rate without hedge) in 2003. If 9,000 Jetta were sold in US, in 2003, by 60% forward hedge and 40% not hedged. What would be profits or loss from sales of 9,000 Jetta in US?

a) Profit of 2.232 million Euro

b) Profit of 1.235 million Euro

c) Profit of 0.392 million Euro

d) Profit of 2.895 million Euro

2) Let's suppose you have $1 million to invest.

You are considering to invest in UK first, then convert the British Pound back to US$ in the future.

You know following information:

Annual Interest rate on investment in US:1%

Annual Interest rate on investment in UK: 2%

Investment period: 1 year

Current exchange rate: 1.52 $/BP

Forward exchange rate which you can apply when converting BP to US$: 1.51 $/BP

What will be profit or loss if you apply the covered-interest arbitrage?

a) Profit, about $28,424

b) No profit. You will lose money.

c) Profit, about $13,289

d) Profit, about $36,838