1

1. Suppose one year interest rates in Canada and Spain are 3% and 5%, respectively, and the spot value of the Canadian dollar is .80 euros. What should be the one year forward rate according to IRP? (Assume Canada is the home country and round intermediate steps to four decimals.)

   .7848/C$

   C$.8155/

   C$1.2263/

   C$1.2743/

6.25 points

QUESTION 2

1. Covered interest arbitrage is always possible when the covered rate of return does not equal the domestic country's interest rate.

   True

   False

6.25 points

QUESTION 3

1. Use the following information to answer the next three questions.

   An investment banker in Spain notices that 1 year interest rates in Spain and Mexico are 8% and 12%, respectively. Current spot rates are as follows:

   1.02/$, $.15/MP

   The one year forward rate is .18/MP and the expected spot rate one year from now is .14/MP.

   What should the forward premium be for IRP to hold?

   .037

   -.0357

   .04

   -.04

6.25 points

QUESTION 4

1. Find the uncovered rate of return from Spain's point of view if the banker's expectation of the future exchange rate is accurate.

   .0248

   .0279

   .035

   -.0118

6.25 points

QUESTION 5

1. Assuming that the banker has access to one million euros, find her covered interest arbitrage profit (in euros). Round intermediate steps to four decimals.

   0

   38,600

   197,700

   237,700

6.25 points

QUESTION 6

1. Use the following information to answer the next two questions.

   As of today, the spot exchange rate is 1.5/$. The U.S. interest rate is 6% and the interest rate in the euro zone is 4%. What is the one-year forward rate that should prevail according to IRP? (Assume the US is the home country andround intermediate steps to four decimals.)

   1.5288

   .6795

   .6541

   1.4717

6.25 points

QUESTION 7

1. Suppose that the one year forward rate is $.75/. Find the profit (in terms of percentage returns) you could earn via covered interest arbitrage. Round intermediate steps to four decimals.

   .1299

   .1324

   .1099

   .1234

6.25 points

QUESTION 8

1. Use the following information to answer the next two questions.

   Suppose a French investor with access to 600,000 euros sees the following:

   SR: C$1.05/euro

   FR: C$1.25/euro

   French interest rate=.09

   Canadian interest rate=.16

   What should the forward premium be according to IRP?

   .1905

   .0642

   -.0603

   -.16

6.25 points

QUESTION 9

1. Find the percentage return available via covered interest arbitrage.

   .1856

   .1744

   .1156

   .291

6.25 points

QUESTION 10

1. The covered rate of return cannot exceed the uncovered rate of return because the covered rate of return involves less risk.

   True

   False

6.25 points

QUESTION 11

1. Suppose that the nominal interest rate in Thailand is higher than the nominal interest rate in Japan. Which of the following will occur according to the International Fisher Effect?

   The Japanese yen will appreciate in nominal terms relative to the Thai baht.

   Expected inflation is higher in Japan relative to Thailand.

   The Thai baht will appreciate in nominal terms relative to the Japanese yen.

   None of the above

6.25 points

QUESTION 12

1. Use the following information to answer the next two questions.

   1. Assume a British investor with access to 500,000 pounds observes the following situation:

   SR Spot rate: $1.11/BP

   UK 1 year interest rate: .09

   US 1 year interest rate: .11

   Expected spot rate one year from now: BP.92/$

   How many pounds could he have earned if he used an uncovered investment strategy and he is correct about his prediction? Round intermediate steps to four decimals.

   1500

   21,750

   19,594.59

   24,142.5

6.25 points

QUESTION 13

1. What should have been the spot rate at the end of the year according to IFE?

   .9034

   1.09

   .8847

   .9174

6.25 points

QUESTION 14

1. Uncovered interest investing is only profitable if the uncovered rate of return from a country's point of view is different from that country's interest rate.

   True

   False

6.25 points

QUESTION 15

1. Use the following information to answer the next two questions.

   The one year interest rate in Canada and Mexico is 10% and 15%, respectively. The current quotes for Canadian dollars and pesos are 1MP=.15USD and .15USD. A Canadian hedge fund manager believes that the spot rate at the end of the year will be 1MP=.12CD. The manager has access to 10 million Canadian dollars and an equivalent amount of pesos.

   What should be the percentage change in direct quotes according to the international Fisher effect?

   -.0435

   .0455

   .0467

   -.05

6.25 points

QUESTION 16

1. Assume that the manager utilized an uncovered investment strategy based on his exchange rate prediction. What would have been his profit( in terms of percentages) if he was correct?

   .15

   .0154

   .0918

   .0418