1. The spot rate is $40/, the 2 year forward exchange rate is $50/euro, and your personal forecast is that the spot rate will be $1.35/ two years from today.

1. The euro is at forward discount of -1.79%
2. The dollar is at forward discount of -3.33%
3. The euro is at forward premium of 7.14%
4. The dollar is at forward premium of 3.70%

2. If a country has a persistent trade deficit, what policies can narrow the deficit?

1. Impose tariffs and cut taxes.
2. Raise taxes and reduce interest rates.
3. Decrease government spending and increase interest rate.
4. Dollarize and raise taxes.

3. Assume the current U.S. dollar British pound spot rate is 0.6993 /$. If the current nominal 2-year interest rate in U.S. is 5% and the comparable rate in Britain is 6%, what is the approximate forward exchange rate for 2 years? (Assume you have $2,000,000 to invest)

1. 1.4100 $/$
2. 1.4205 $/
3. 0.7060 /$
4. 0.7127 /$

4. The US 1-year interest rate is 5% per year and the 1-year UK interest rate is 3%. The spot rate is $55/ and the 1-year forward rate is $60/

1. The optimal strategy is to borrow dollars.
2. The optimal strategy is to borrow pounds because the UK interest rates are lower.
3. The optimal strategy is to borrow pounds because the pound is at forward premium.
4. The optimal strategy is to invest in dollars because the higher US interest rates more than compensate for the forward discount on the dollar.

5. Japan is expected to have inflation of 2% for the coming year, while the US is expected to have inflation of 3%. The spot exchange rate is yen 125/$. A Toyota made in Japan costs yen 4.75 million today. Purchasing Power Parity holds. Which of the following is true?

1. A car made in the US sold in Japan will cost 4,797,500 one year from today.
2. A car made in Japan and sold in the US will cost $39,140 one year from today.
3. A car made in Japan and sold in the US will cost $38,760 one year from today.
4. A car made in the US and sold in Japan will cost 4,892,500 one year from today.