1) The current spot exchange rate is $1.55/ and the three-month forward rate is $1.50/. Based on your analysis of the exchange rate, you are confident that the spot exchange rate will be $1.52/ in three months. Assume that you would like to buy or sell 1,000,000. What actions do you need to take to speculate in the forward market?

Multiple Choice

• Take a long position in a forward contract on 1,000,000 at $1.50/.
• Take a short position in a forward contract on 1,000,000 at $1.50/. ----- (Incorrect answer)
• Buy euro today at the spot rate, sell them forward.
• Sell euro today at the spot rate, buy them forward.

2) As of today, the spot exchange rate is 1.00 = $1.25 and the rates of inflation expected to prevail for the next year in the U.S. is 2 percent and 3 percent in the euro zone. What is the one-year forward rate that should prevail?

Multiple Choice

• 1.00 = $1.2379
• 1.00 = $1.2623-----incorrect answer
• 1.00 = $0.9903
• $1.00 = 1.2623

3) The following information is used for the next question.

The current market conditions in the U.S. and Sweden are summarized as follows. Annual interest rates in the U.S. and Sweden are 3% and 1%, respectively. Current spot rate is USD 0.10 = SEK 1.00. SEK stands for Swedish krona. One-year forward rate is USD 0.12 = SEK 1.00. You are a Swedish investor who can borrow either USD 100,000 or SEK 1,000,000.

If you are a Swedish investor who can borrow either USD 100,000 or SEK 1,000,000 (the equivalent amount at the spot rate), what will be your profit from a covered interest arbitrage opportunity? You will want to realize your profit in Swedish krona. Enter only the numeric portion of your answer in two decimal places without commas. If no arbitrage is possible, enter 0.