9. Find the percentage return available via covered interest arbitrage.

.1856

.1744

.1156

.291

10. The covered rate of return cannot exceed the uncovered rate of return because the covered rate of return involves less risk.

True

False

11. Suppose that the nominal interest rate in Thailand is higher than the nominal interest rate in Japan. Which of the following will occur according to the International Fisher Effect?

The Japanese yen will appreciate in nominal terms relative to the Thai baht.

Expected inflation is higher in Japan relative to Thailand.

The Thai baht will appreciate in nominal terms relative to the Japanese yen.

None of the above

12. Use the following information to answer the next two questions.

1. Assume a British investor with access to 500,000 pounds observes the following situation:

SR Spot rate: $1.11/BP

UK 1 year interest rate: .09

US 1 year interest rate: .11

Expected spot rate one year from now: BP.92/$

How many pounds could he have earned if he used an uncovered investment strategy and he is correct about his prediction? Round intermediate steps to four decimals.

1500

21,750

19,594.59

24,142.5

13. What should have been the spot rate at the end of the year according to IFE?

.9034

1.09

.8847

.9174

14. Uncovered interest investing is only profitable if the uncovered rate of return from a country's point of view is different from that country's interest rate.

True

False

15. Use the following information to answer the next two questions.

The one year interest rate in Canada and Mexico is 10% and 15%, respectively. The current quotes for Canadian dollars and pesos are 1MP=.15USD and .15USD. A Canadian hedge fund manager believes that the spot rate at the end of the year will be 1MP=.12CD. The manager has access to 10 million Canadian dollars and an equivalent amount of pesos.

What should be the percentage change in direct quotes according to the international Fisher effect?

-.0435

.0455

.0467

-.05

16. Assume that the manager utilized an uncovered investment strategy based on his exchange rate prediction. What would have been his profit( in terms of percentages) if he was correct?

.15

.0154

.0918

.0418