A Big Mac costs 3.0 in Europe, while it costs $4.0 in the U.S. The actual market exchange rate is S($/)=1.25. Then

Select one:

a. real (effective) exchange rate implied by the Big Mac is 1 and the euro is at parity.

b. real (effective) exchange rate implied by the Big Mac is 0.94 and the euro is under-valued by 6%.

c. real (effective) exchange rate implied by the Big Mac is 0.75 and the euro is under-valued by 25%.

d. real (effective) exchange rate implied by the Big Mac is 1.07 and the euro is over-valued by 7%.

e. real (effective) exchange rate implied by the Big Mac is 1.33 and the euro is over-valued by 33%.

Henry borrows 100,000 at an interest rate i=1.5%; converts it into Australian dollars(AU$) at the current spot rate S(/AU$)=80; deposits the funds in a Australian savings account for a year at interest rate i_AU$=7.5%. At the end of year, Henry converts his revenue in back into funding currency at the spot rate S₁(/AU$). If the spot rate is S₁(/AU$)=75, Henrys net profit/loss is

Select one:

a. 13166.67

b. 781.25

c. - 13166.67

d. 718.75

e. - 718.75

A bank is considering using a three against six $2,000,000 FRA to cover its potential loss. The purpose of the FRA is to cover the interest rate risk caused by the maturity mismatch from having made a six-month Eurodollar loan and having accepted a three-month Eurodollar deposit. The agreement rate with the buyer is 4.6%. There are actually 92 days in the three-month FRA period. Which one of the following statements is correct?

Select one:

a. Without the FRA, the bank will lose if the market interest rate drops at the end of three months.

b. If the settlement rate is 4.8% three months from today, then the buyer pays the seller.

c. If the settlement rate is 4.8% three months from today, then the FRA is worth $1009.84

d. To hedge the loss caused by maturity mismatch, the bank should be a seller of the FRA.

e. To hedge the risk caused by maturity mismatch, the bank could take the buyers position if it uses the Euro-Dollar Interest Rate Futures instead.