Intro

1. Assume that the real interest rate is 2% in the U.S. and 1% in Canada. The annual nominal interest rate is 3.7% in the U.S. and 4.9% in Canada. The spot exchange rate is $0.85 per Canadian dollar.

Part 1

What is the approximate expected spot exchange rate in one year (in U.S. dollars per Canadian dollar) according to the Fisher effect and purchasing power parity?

Intro

2. One Australian dollar is currently worth $0.69. Assume that the real interest rate is constant everywhere, and that the annual nominal interest rate is 5.5% in the U.S. and 3.1% in Australia.

Part 1

What is the (exact) expected exchange rate in one year (measured in U.S. dollars per Australian dollar) according to the international Fisher effect?

Intro

3. The current spot exchange rate is $0.051 per Mexican peso. Assume that the real interest rate is 2% everywhere, and that the annual nominal interest rate is 3.4% in the U.S. and 4.8% in Mexico.

Part 1

What is the approximate expected percentage change in the exchange rate (measured in U.S. dollars per Mexican peso) according to the international Fisher effect?

Intro

4. The table below shows expected exchange rates in one year and all foreign currency transactions for Delta Blue Inc, a Minnesota-based multinational corporation, over the next year:

Currency	Expected exchange rate	Cash inflow	Cash outflow
Euro	$1.17	50,000	45,000
Peso	$0.055	MXN800,000	MXN700,000
Yen	$0.0092	24,000,000	18,000,000
Yuan	$0.147	260,000	420,000

Part 1

What is the expected net cash flow in U.S. dollars from all euro transactions?

Part 2

What is the expected net cash flow in U.S. dollars from all yuan transactions?

Part 3

Which currency is the company most exposed to?

Euro

Peso

Yen

Yuan