Chapter 3 1. Bid/Ask Spread Utah Banks bid price for New Zealand dollars is $.582 and its ask price is $.625. What is the bid/ask percentage spread? (1 point)

$0.625 - $0.582 / $0.625 $0.043 / $0.625 = 0.0688 * 100 = 6.88%

2. Currency Transactions Assume that a bank's bid rate on euro () is $1.08 and its ask rate is $1.12. (1 point)

(a) If you want to sell 10,000 in exchange for US dollars, how much US dollars will you receive?

(b) If you have euro, what is the amount of euros that you need to purchase $10,000?

3. Cross Exchange Rate Assume Malaysian ringgit is worth $.25 and the Japanese yen is worth $.0096. What is the cross rate of the ringgit with respect to yen? That is, what is the value of ringgit in yen, or how many yen equal a ringgit? (1 point)

4. Foreign Exchange You just came back from Canada, where the Canadian dollar was worth $.80. You still have C$500 from your trip and could exchange them for dollars at the airport, but the airport foreign exchange desk will only buy them for $.76. Next week, you will be going to Mexico and will need pesos. The airport foreign exchange desk will sell you pesos for $.08 per peso. You met a tourist at the airport who is from Mexico and is on his way to Canada. He is willing to buy your C$500 for 5,000 pesos. Should you accept the offer or cash the Canadian dollars in at the airport? Explain. (1 point)

5. Forward Contract Your company desires to avoid the risk from exchange rate fluctuations, and it will need C$400,000 in 90 days to make payment on imports from Canada. You decide to hedge your position by purchasing Canadian dollar forward. The current spot rate of the Canadian dollar is $.75 while the forward rate is $.77. You expect the spot rate in 90 days to be $.78. How many dollars will you need for the C$400,000 in 90 days if you purchase Canadian dollar forward? (1 point)

Chapter 4 1. Percentage Depreciation Assume the spot rate of the euro is $1.20. The expected spot rate 1 year from now is assumed to be $1.25. What percentage change over the next year does this reflect? Is it appreciation or depreciation? (1 point)

2. Inflation Effects on Exchange Rates Assume that the U.S. inflation rate becomes low relative to Canadian inflation. Other thing being equal, how should this affect the (a) U.S. demand for Canadian dollars, (b) supply of Canadian dollars for sale, and (c) equilibrium value of the Canadian dollar? (1 point)

3. Interest Effects on Exchange Rates Assume U.S. interest rates increase relative to British interest rates. Other thing being equal, how should this affect the (a) U.S. demand for British pounds, (b) supply of pounds for sale, and (c) equilibrium value of the pound? (1 point)

4. Speculation Assume the following information regarding U.S. and European annualized interest rates:

Currency Lending Rate Borrowing Rate

U.S. Dollar ($) 6.73% 7.20%

Euro () 6.80% 7.28%

Trensor Bank can borrow either $10 million or 10 million. The current spot rate of the euro is $1.16. Furthermore, Trensor Bank expects the spot rate of the euro to be $1.20 in 90 days. What is Trensor Bank's dollar profit from speculating if the spot rate of the euro is indeed $1.20 in 90 days? (Round to the nearest whole dollar) (2 point)