1. A) Explain the Bretton Wood Monetary System post World War II.

B) Whats the Triffin dilemma facing the US dollars as a reserve currency?

2) a) Explain the International Fisher Effect (IFE).

b) The current Australia / USD exchange rate is 1.08. The current interest rate is 3% in the U.S. and 5% in Australia. What will be the expected exchange rate of AUD /USD under IFE?

3) a) Explain the Purchase Power Parity (PPP) theory

b) List three major determinants of a countrys currency exchange value.

4) You find the following exchange values for these two currencies:

USD / Pound = $1.25 and euro /pound = $1.20

1. What is the USD/ euro exchange cross rate?
2. If USD / euro is trading at 1.06 in the exchange, which currency is overvalued?
3. If you start with $1mm USD, what triangular arbitrage profit you can make?

5) You notice that the US interest rate is at 3% while Japan interest rate is at 1%. Currently the spot exchange rate for Yen / USD is at 100.

a) Explain the Interest Rate Parity (IRP) condition

b) What will be the forward exchange rate according to Interest Rate Parity?

6) a) list three major accounts under Balance of Payment.

b) Explain how the US Balance of Payment is balanced.

7) The spot exchange rate for CAD/USD is 1.25; the forward rate in 12 months for CAD/USD is 1.27. US interest rate is 1.5% per year while Canadian interest rate is 2% per year. You have 1.25 million CAD dollars to invest. You decide to convert it into USD with the spot rate and use the Covered Interest Arbitrage to make a profit. Questions:

a) Calculate the amount of US dollars you will have in one year, including interest income, by converting CAD in spot rate and invest in US interest rate;

b) Calculate the amount of Canadian dollars you will have in one year by converting the US dollars back to CAD using the forward rate;

3. Whats the higher profit in CAD from this Covered Interest Arbitrage?

8) XYZ Company will receive 5 million euro from a product sales in Spain in one year. You are concerned about declining Euro vs USD exchange rate over the next 12 months and like to lock in the exchange rate now. Each Euro futures contract is worth 125,000 Euro. The exchange rate currently is 1.10 USD /Euro. A Euro futures contract with one year expiration is at 1.09. You decide to sell the euro futures to hedge the currency risk. One year later, Euro spot rate depreciates to 1.08. Questions:

1. How many contracts you will be selling to hedge the currency risk?
2. Whats the gain on your futures contract one year later?
3. Whats the loss on the revenue one year later?

9) Company A is based in Japan and has a subsidiary in the US that requires funding in USD. It decides to enter into a currency swap agreement with company B in US. Company A will pay 3% interest on a Yen principal of 100,000,000 and receive 4% on a US$ principal of $1,000,000 every year for the next 3 years. The current exchange rate is 100 Yen per USD.

Questions:

1. Whats the cash flow exchanges for company A at the beginning of the swap?

b) Whats the cash flow exchanges for company A in the first year?

c) What are the potential advantages for company A in this swap?

10) Your company has a $100 million variable rate debt outstanding and you are concerned about higher debt payment from rising interest rates over next 12 months. You decide to use Eurodollar future contracts to protect against rising interest rates. The current 12-month Eurodollar futures contract interest rate is 1.5% LIBOR. Each contract is $1 million USD.

12 months later, The LIBOR rate increases to 2%.

Questions:

1. How many contracts you will need to sell to hedge the interest rate risk?
2. Whats the gain from the future contracts 12 months later?
3. How much higher interest payment 12 months later?