1. Suppose the current exchange rate is $2.000/. The British risk-free rate is 8.

15% and the Canadian risk-free rate is 4.03%. a) What must be the one-year forward exchange rate according to Interest Rate Parity? Carry your calculations to four decimal digits, e.g., $1.9547/. b) If the actual one-year forward rate is $1.9675/, which way would capital flow: from Canada to Britain or for from Britain to Canada? Explain your reasoning. 2. Suppose Venezuela pegs its currency to the US dollar at a fixed rate of 8 pesos per dollar. During the year there is 60% inflation in Venezuela and 2% in the United States. What will be the percentage appreciation or depreciation of the real value of the peso by the end of the year? You must state whether it is a real appreciation or depreciation, and the sign of your answer must agree with your statement. Carry your calculations to four decimal digits, e.g., -0.0875 (-8.75%) or +0.0912 (+9.12%).

3. Suppose that during a given year a country exports $50 and imports $32 in goods, receives net $4 interest from foreigners and spends net $8 on tourism. During the same year, official reserves rise by $6 and errors and omissions equal zero. a) b) c) What is the current account balance at the end of the year? What must be the financial account balance? What must be the domestic savings-investment balance?

4. In New York the British pound is quoted at $1.6250, and the euro is quoted at $1.2250, whereas in London the euro is quoted at 0.7560.

a) Is there an arbitrage opportunity?

Explain why?

(2)

b) What is the arbitrage profit on per 1 million arbitraged.

(2)

5. Calculate the all-in cost of the following bond issue: Express your answer in percent p.a., correct to two decimal digits, for example, 3.27%. Up-front fees and expenses: Coupon interest: Maturity: 5.0% of the principal amount. 5% p.a., accrued annually but paid all at once at maturity. Five years. (3)

6. Suppose you are holding a short position in a 125,000 Euro futures contract that matures in 76 days. The initial margin (performance bond) requirement is $2,750 and maintenance margin is $2,500. Currently your account balance is $2,575. If yesterdays settlement price was $1.4500/ and todays settlement price is $1.4550, how much must you deposit as a result of marking to market?

7. ATI, a US company will receive 50 million from a Japanese customer in 90 days. In the following questions, with the hedge means the amount ATI would receive without a hedge, plus or minus the gain or loss from the hedge. a) Suppose that to hedge the receivable ATI sells yen futures today at $0.0160/. The futures contracts expire in 90 days. If ATI holds the futures position till expiration and the spot price at expiration is $0.0150/, what is the net dollar amount (with the hedge) that ATI will receive?

b) Suppose that to hedge the receivable ATI buys put options today with a strike price of $0.0160/ and pays the put premium of $0.0002/. The puts expire in 90 days. If the spot price at expiration is $0.0168/, what is the net dollar amount (with the hedge) that ATI will receive?

c) Suppose that to hedge the receivable ATI buys put options today with a strike price of $0.0160/ and pays the put premium of $0.0002/. The puts expire in 90 days. If the spot price at expiration is $0.0142/, what is the net dollar amount (with the hedge) that ATI will receive?