Spot rates and forward rates. On January 1, one U.S. dollar can be exchanged for eight foreign currencies (FC). The dollar can be invested short term at a rate of 4%, and the FC can be invested at a rate of 5%.

1. Calculate the direct and indirect spot exchange rates as ofJanuary 1.

2. Calculate the 180-day forward rate to buy FC(assume 365days per year).

3. If the spot rate is 1 FC 14 $0.740 and the 90-day forward rateis $0.752, what does this suggest about interest rates in the two countries?

4. Explain why a weak dollar relative to the FC would likelyincrease U.S. exports.

5. Discuss what would happen to the forward rate if the dollarstrengthened relative to the FC.