$2.$ Calculate the cross rates given the following information:

a$)$ Assume CD$/$$ $=1\mathrm{.}56$ and $$/=1\mathrm{.}001.$ Find the CD$/$ exchange rate. Note CD $=$

Canadian dollars.

b$)$ Assume that $1$ euro $()=16$ Argentinean peso and $1$ euro $=4\mathrm{.}5$ Brazilian real. Find

the peso$/$real cross exchange rate.

c$)$ Assume that $1$ euro $()=3\mathrm{.}3$ Turkish lira and $1$ Australian dollar $=0\mathrm{.}6.$ Find the

lira$/$AUD exchange rate. Note: AUD $=$ Australian dollar.

$3.$ Suppose a US firm imports $1,000,000$ worth of goods from a French firm and is

required to pay the French firm in three months. To minimize the risk associated with

this foreign exchange transaction, the US firm purchases an options contract which

allows them to purchase euros at $$1\mathrm{.}10.$ The cost of this contract is $$50,000.$ If the

future spot rate $($in three months$)$ is $$1\mathrm{.}20,$ what will be the total cost to the US firm for

the imports?

$4.$ A U$.$S$.$ firm exports goods to a firm in Italy and will be paid $5,000,000$ in $3$ months. The

spot rate today

Et is $$1=1$ and the U$.$S$.$ firm can purchase an options contract with a

forward rate F $1+$t of $$1\mathrm{.}20=1.$ The contract costs $$50,000.$

a$)$ To determine whether they $($the U$.$S$.$ firm$)$ should buy the options contract, the firm

hires two consultants to research expected changes in the exchange rate. Based on

their research, consultant A expects the future spot rate, E$*1+$t

to be $$1\mathrm{.}50=1$ and

consultant B expects the future spot rate, E$*1+$t

to be $$1\mathrm{.}15=1.$ Would consultant A

advise the firm to purchase the contract? What about consultant B$?$ Explain.

b$)$ The spot rate in three months is $$1\mathrm{.}22=1.$ What are the net earnings for the U$.$S$.$

firm from this trade transaction assuming they followed the advice of consultant A$?$

What about if they followed the advice of consultant B$?$ Explain.

c$)$Which consultant had the better prediction? Explain.