Exam 6: International Parity Relationships and Forecasting Foreign Exchange Rates

Covered Interest Arbitrage Assume that you are a retail customer Please note that your answers are worth zero points if they do not include currency symbols ($, €) -If you had €1,000,000 and traded it for USD at the spot rate,how many USD will you get?

USING YOUR PREVIOUS ANSWERS and a bit more work,find the 1-year forward exchange rate in $ per € that that satisfies IRP from the perspective of a customer who borrowed €1m,traded for dollars at the spot rate and invested at i_$ = 2%.

Generating exchange rate forecasts with the fundamental approach involves

The price of a McDonald's Big Mac sandwich

One implication of the random walk hypothesis is

Suppose that the one-year interest rate is 5.0 percent in the United States; the spot exchange rate is $1.20/€; and the one-year forward exchange rate is $1.16/€.What must one-year interest rate be in the euro zone to avoid arbitrage?

Covered Interest Arbitrage Assume that you are a retail customer Please note that your answers are worth zero points if they do not include currency symbols ($, €) -If you had €1,000,000 and traded it for USD at the spot rate,how many USD will you get?

Which of the following issues are difficulties for the fundamental approach to exchange rate forecasting?

There is (at least)one profitable arbitrage at these prices.What is it?

Covered Interest Arbitrage Assume that you are a retail customer (i.e. you buy at the ask and sell at the bid). Please note that your answers are worth zero points if they do not include currency symbols ($, €) -If you had borrowed $1,000,000 and traded for euro at the spot rate,how many € do you receive?

Consider a bank dealer who faces the following spot rates and interest rates.What should he set his 1-year forward bid price at?

Suppose that you are the treasurer of IBM with an extra US$1,000,000 to invest for six months.You are considering the purchase of U.S.T-bills that yield 1.810% (that's a six month rate,not an annual rate by the way)and have a maturity of 26 weeks.The spot exchange rate is $1.00 = ¥100,and the six month forward rate is $1.00 = ¥110.The interest rate in Japan (on an investment of comparable risk)is 13 percent.What is your strategy?

Covered Interest Arbitrage Please note that your answers are worth zero points if they do not include currency symbols ($, €) -If you borrowed $1,000,000 for one year,how much money would you owe at maturity?

The random walk hypothesis suggests that

Covered Interest Arbitrage Assume that you are a retail customer (i.e. you buy at the ask and sell at the bid). Please note that your answers are worth zero points if they do not include currency symbols ($, €) -If you had €1,000,000 and traded it for USD at the spot rate,how many USD will you get?

Suppose that the one-year interest rate is 5.0 percent in the United States and 3.5 percent in Germany,and that the spot exchange rate is $1.12/€ and the one-year forward exchange rate,is $1.16/€.Assume that an arbitrageur can borrow up to $1,000,000.

The main approaches to forecasting exchange rates are

If you had €1,000,000 and traded it for USD at the spot rate,how many USD will you get?

Suppose that you are the treasurer of IBM with an extra US$1,000,000 to invest for six months.You are considering the purchase of U.S.T-bills that yield 1.810% (that's a six month rate,not an annual rate by the way)and have a maturity of 26 weeks.The spot exchange rate is $1.00 = ¥100,and the six month forward rate is $1.00 = ¥110.What must the interest rate in Japan (on an investment of comparable risk)be before you are willing to consider investing there for six months?

Covered Interest Arbitrage Please note that your answers are worth zero points if they do not include currency symbols ($, €) -If you had €1,000,000 and traded it for USD at the spot rate,how many USD will you get?