Please attempt all questions. Q 1, Q 2 and Q 3 are on relative PPP. Q 4 and Q 5 are on forwards. Q 6 and Q 7 are on real exchange rates and relative PPP.

Q 1, Q 2 and Q 3 combined: Q 1: Today is April 24th 2022. You have just been appointed Chief Economist at Currency Forecasting Inc, an economic research consulting company in Washington DC. Congratulations! You get a phone call from one of your company's clients. The client wants to know, assuming that PPP holds, what should the Malawian Kwacha (MKD) versus South African Rand (SAR) exchange rate (quoted as the number of MKD per SAR) be in two years time (i.e., on April 24th 2024)?

You have the following information: The expected inflation rates for Malawi and South Africa for each of the next 2 years will be as follows: Malawi's annual inflation rate for each of the next 2 years is expected to be 15% per annum. South Africa's annual inflation rate for each of the next 2 years is expected to be 5% per annum.

The current spot exchange rate is 55.0 MKD = SAR1 (i.e., 55.0 MKD per SAR).

Q 1: How do you answer the client: What should the Malawian Kwacha (MKD) versus South African Rand (SAR) exchange rate be in two years time (i.e., on April 24th 2024)? Your answer is to be given as the number of MKD per SAR and be correct to three decimal places. Assume (relative) PPP holds.

Q 2: Suppose the actual spot exchange rate on April 24th 2024 turns out to be 54.05 MKD per SAR. Is there an arbitrage or no arbitrage?

Q 3: This continues from Q1 and Q2. Suppose the actual spot exchange rate on April 24th 2024 turns out to be 54.05 MKD per SAR (i.e., the same as in Q 2). What has happened? Pick the best choice?

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Q 4 and Q 5 combined:

You are a trader (arbitrageur) at Platypus Capital (a hedge fund). You are given the following information. The spot exchange rate today for the number of Norwegian Krona (NOK) per Euro (EUR) is 4.80 NOK = 1 EUR. The annualised Norwegian LIBOR interest-rate (for the three month period starting today) is 4%. The annualised Euro LIBOR interest-rate (for the three month period starting today) is 8%. Assume three months is exactly 0.25 years.

Q 4: What is the three month forward rate for the Norwegian Krona (NOK) per Euro (EUR). Give your answer correct to four decimal places.

Q 5: Suppose that a bank is actually quoting the three month forward rate for the Norwegian Krona (NOK) per Euro (EUR) as 4.7900 - 4.8000.

Suppose that you are allowed to borrow 12 mio NOK today (at 4%). How many NOK arbitrage profit can you make? Give your answer to the nearest NOK. Do your calculations in excel and avoid rounding errors.

Q 6 and Q 7 combined: Q 6: Today is May 24th 2023. You are Chief Economist at Cornerstone Economics Inc, an economic research consulting company in Sydney, Australia, with great views over Sydney harbour. Wow! I am jealous!

On May 24th 2018 (EXACTLY FIVE YEARS AGO), the (nominal) spot exchange rate for the number of NZD per AUD was 1.1000. Today, on May 24th 2023, the (nominal) spot exchange rate for the number of NZD per AUD is 1.1200

On May 24th 2018, the Consumer Price Index in Australia was 100 while on May 24th 2023 (today), it is 110.0. On May 24th 2018, the Consumer Price Index in New Zealand was 100 while on May 24th 2023 (today), it is 112.0.

Assume that the real exchange rate on May 24th 2018 was normalised to be 1.1000 (i.e., the same as the (nominal) exchange rate).

Q 6: Compute the real (REPEAT REAL) exchange for the number of NZD per AUD on May 24th 2023. Enter your answer to 4 decimal places. Don't worry if Canvas appears not to accept the answer to 4 decimal places (it does not internally even if, for example, only one decimal place gets "displayed").

Q 7: Did relative PPP hold over the five years from May 24th 2018 to May 24th 2023? Pick the best choice.