ReferRefer to the following information for the next $3$ questions:

$180-$day forward:

Spot: $$

$ interest rate:

SF interest rate:

$$.\frac{6604}{S}F$

$$\mathrm{.}6690/$SF

$12\%($annualized$)$

$10\%($annualized$)$Does interest rate parity hold?

$1\mathrm{.}12=(\frac{0\mathrm{.}6604}{0\mathrm{.}6690})(1\mathrm{.}10)$

a$.$ Yes

b$.$ No

$(1+$idc$)=(\frac{Fd\frac{c}{F}C}{Sd\frac{c}{F}C})(1+$iFC$)$

Everything else equal, would you invest in U$.$S$.$ dollars or SF$?$

a$.$ in SF

$($b$.)$ in U$.$S$.$ dollars

If you need SF in $180$ days, would you buy SF in the spot market or the forward market?

a$.$ in the spot market

b$.$ in the forward market

Use the following information to answer problems $8$ and $9$ :

Suppose that on January $1$ a firm in Mexico borrows $$20$ million from Citibank $($USA$)$ for one

year at $8\mathrm{.}00\%$ interest per annum. During the year U$.$S$.$ inflation is $2\mathrm{.}00\%$ and Mexican inflation

is $12\mathrm{.}00\%.$ The loan was taken when the spot rate was Peso $3\mathrm{.}40/$US$$.$ At the end of the one$-$

year loan period the exchange rate was Peso $5\mathrm{.}80/$US$$.$

Based on the above information, what is the cost to the firm of the loan in Mexican

peso's $($percent$)?$

a$.8\mathrm{.}00\%$

b$.20\mathrm{.}00\%$

c$.45\mathrm{.}72\%$

d$.84\mathrm{.}24\%$

Based on the above information, what is the real cost of the loan to the firm in'peso

terms?

a$.-3\mathrm{.}57\%$

a$.-3\mathrm{.}57\%$

b$.20\mathrm{.}96\%$

c$.80\mathrm{.}63\%$

d$.72\mathrm{.}24\%$

The relationship between the percentage change in the spot exchange rate over time and

the differential between comparable intere

known as

a$.$ absolute PPP

b$.$ the law of one price

c$.$ relative PPP

d$.$ the international Fisher Effect