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 intermediatesteps to four decimals.)

.7848/C$

C$.8155/

C$1.2263/

C$1.2743/

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

True

False

3. 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

4. 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

5. 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. 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 and round intermediate steps to four decimals.)

1.5288

.6795

.6541

1.4717

7. 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

8. 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