1)You observed the bid rate of the New Zealand dollar is $.3232 while the ask rate is $.3245 at Bank X. The bid rate of a New Zealand dollar is $.3324 while the ask rate is $.3342 at Bank Y. What would be your dollar amount profit if you use $1,000,000 to execute locational arbitrage?

2)Derek Jones, a foreign exchange trader at Charles Schwab, can invest $1 million, or the foreign currency equivalent of the banks short-term funds, in a covered interest arbitrage with Japan. Using the following quotes, can Derek make a covered interest arbitrage profit? If so, show the steps and calculate the amount of profit in USD.

Arbitrage funds available	$1,000,000
Spot exchange rate (/$)	106.00/$
6-month forward rate (/$)	103.50/$
US dollar 6-month interest rate	4%
Japanese yen 6-month interest rate	2%

3)Heidi Jensen is attempting to determine whether US/Japanese financial conditions are at parity. The current spot rate is a flat 89.00/$, while the 360-day forward rate is 84.90/$. Forecast inflation is 1.100% for Japan, and 5.900% for the US. The 360-day yen deposit rate is 4.700%, and the 360-day dollar deposit rate is 9.500%.

a)Calculate whether interest rate parity, purchasing power parity, and international fisher effect conditions hold between Japan and the US.

b)Find the forecasted change in the Japanese yen/US dollar exchange rate one year from now.

4)In China a Big Mac costs Yuan 16 (local currency), while in the US the same Big Mac costs $4.56. The exchange rate between Yuan and US dollar is Yuan6.1341/$. According to purchasing power parity, is Chinese Yuan overvalued or undervalued? Why?

5) The interest rate in the U.K. is 2%, while the interest rate in the U.S. is 1.5%. The spot rate for the British pound is $1.55. According to the international Fisher effect (IFE), what is new level of the British pound?

6) Bronco Co. is a U.S.-based MNC that has subsidiaries in Spain and Germany. Both subsidiaries frequently remit their earnings back to the parent company. The Spain subsidiary generated a net outflow of 1,000,000 this year, while the German subsidiary generated a net inflow of 2,500,000. What is the net inflow or outflow as measured in U.S. dollars this year? The exchange rate for the euro is $1.18.

7)If one-year nominal interest rate in the U.S. is 3%, while the one-year nominal interest rate in Australia is 5%. The spot rate of the Australian dollar is $.97. Interest Parity is held. You will need 1 million Australian dollars in one year. Today, you purchase a one-year forward contract in Australian dollars. How many U.S. dollars will you have in one year from your forward contract?

8)Today, the one-year U.S. interest rate is 2.53%, while the one-year interest rate in Mexico is 6%. The spot rate of the Mexico peso (MXP) is $.08 The one-year forward rate of the MXP exhibits a 11% discount. Determine the yield (percentage return on investment) to an investor from Mexico who engages in covered interest arbitrage.

9)Current one-year interest rates in Europe are 2 percent, while one-year interest rates in the U.S. are 1.6 percent. You convert $100,000 to euros and invests them in France. One year later, you convert the euros back to dollars. The current spot rate of the euro is $1.28.

a. According to the IFE, what should the spot rate of the euro in one year be?

b. If the spot rate of the euro in one year is $1.20, what is your percentage return from your investment?

c. If the spot rate of the euro in one year is $1.35, what is your percentage return from your investment?

d. What must the spot rate of the euro be in one year for your strategy to be successful?