Question 1

If expected inflation is 7.55 percent and the required real return is 5.25 percent, what will the nominal interest rate be according to the Fischer effect?

Question 2
From base price levels of 100 in 2000, Japanese and US price levels in 2003 stood at 112.55 and 116.75, respectively. If the 2000 USD/ exchange rate was USD 0.007692, what should the exchange rate be in 2003?

Question 3
In early 1996, the short-term interest rate in France was 3.7%, and forecast French inflation was 1.8%. At the same time, the short-term German interest rate was 2.6% and forecast German inflation was 1.6%. Based on those figures, what were the real interest rates in France and Germany?

Question 4
In July, the one-year interest rate is 12% on GBP and 9% on USD. If the current exchange rate is USD 1.63/GBP, what is the expected future exchange rate in one year from now?

Suppose a change in expectation regarding future US inflation causes the expected future spot rate to decline to USD 1.52/GBP. What should happen to the US interest rate?

Question 5
Chase Econometrics has just published projected inflation rates for United States and Germany for the next five years. US inflation is expected to be 10 percent per year, and Germand inflation is expected to be 4 percent per year. If the current exchange rate is USD 0.95/, what should the exchange rates for the next five years be? Suppose the US inflation over the next five years turns out to be 3.2%, German inflation averages 1.5%, and the exchange in five years is USD 0.99/. What has happened to the real value of the euro over this five year period?

Question 6
During 1995, the Mexican peso exchange rate rose from Mex $ 5.33/USD ti Mex $ 7.64/USD. At the same time, US inflation was approximately 3% in contrast to Mexican inflaction of about 48.7%. By how much did the nominal value of the peso change during 1995? By how much did the nominal value of the peso change over this period?

Question 7
Suppose 3-year deposit rate on Eurodollars and Eurofrancs (Swiss) are 12 percent and 7 percent, respectively. If the current spot rate for the Swiss fran is USD 0.3985, what is the spot rate implied by these interest rates for the franc three year from now?

Question 8
Assuming the following quotes, calculate how a market trader at Citybank with $ 1 million can make an arbitrage profit. Explain your calculations. Citibank quotes U.S. dollar per pound: National Westimenter quotes euro per pound: $1.71/ 1.77/

Deutsche Bank quotes dollar per euro:

$1.07/

Question 9
Assuming the following quotes, calculate how a market trader at Citybank with $ 5 million can make an arbitrage profit. Explain your calculations. Citibank quotes U.S. dollar per pound: National Westimenter quotes euro per pound: $1.94/ 2.02/

Deutsche Bank quotes dollar per euro:

$1.22/

Question 10
Use the data in the table below to complete the calculation of the implied PPP value fo the currency against the US dollar and the calculation as to whether that currency is undervalued or overvalued against the US dollar. Explain your calculations.

Country/Currency

United States (dollar) Argentina (Peso) Brazil (Reals) Chile (Peso) Mexico (Peso)

Big Mag Prices in Local Currency 4.50 5.75 9.50 1750.00 32.00

Current Exchange Rate(Direct Quotation) 3.25 4.5 675.00 15.8

Big Mag Prices in US Dollars

Implied PPP of the Dollar

Local Currency Under)/Over Valuation

Question 11
Lehman is a foreign exchange dealer for a bank in New York. He has $ 10 million (or its Swiss franc equivalent) for a short term money market investment and wonders if he should invest in US dollars for the 3 months or make an arbitrage investment in the Swiss franc. He faces the rates show in the table: Spot exchange rate 3-month Swiss franc forward rate USD interest rate Swiss franc interest rate SFr 1.35/$ SFr 1.33/$ 5% per year 4% per year

a) Where do you recommend Lehman to invest, and why? b) What is Lehmans rate of return, on annual basis, on this investment?

Question 12
Use the cross-rate table shown below to determine the following rates:
a) b) c) d) e) f) g) US dollars per Japanese Yen Euros per US dollar Euros per Japanese Yen US dollars per Canadian dollar US dollars per Australian dollar US dollars per British pound Swiss francs per US dollar