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USING YOUR PREVIOUS ANSWERS and a bit more work,find the 1-year forward exchange rate in $ per € that satisfies IRP from the perspective of a customer that borrowed $1m traded for € at the spot and invested at i€ = 4%.

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

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The Fisher effect can be written for the United States as:


A) i$=ρ$+E(π$) +ρs×E(π$) i _ { \$ } = \rho _ { \$ } + \mathrm { E } \left( \pi _ { \$ } \right) + \rho _ { \mathrm { s } } \times \mathrm { E } \left( \pi _ { \$} \right)
B) ρ$=i$+E(π$) +i$×E(π$) \rho _ { \$ } = i _ { \$ } + \mathrm { E } \left( \pi _ { \$ } \right) + i _ { \$ } \times \mathrm { E } \left( \pi _ { \$} \right)
C) q=1+π$(1+e) (1+πϵ) q = \frac { 1 + \pi _ { \$ } } { ( 1 + e ) \left( 1 + \pi _ { \epsilon } \right) }

D) F($/€) S($/€) =1+i$1+i€\frac { F ( \$ / € ) } { S ( \$ / € ) } = \frac { 1 + i _ { \$ } } { 1 + i _ { € } }

E) None of the above
F) A) and D)

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Purchasing Power Parity (PPP) theory states that


A) the exchange rate between currencies of two countries should be equal to the ratio of the countries' price levels.
B) as the purchasing power of a currency sharply declines (due to hyperinflation) that currency will depreciate against stable currencies.
C) the prices of standard commodity baskets in two countries are not related.
D) both a and b

E) B) and C)
F) A) and B)

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The International Fisher Effect suggests that


A) any forward premium or discount is equal to the expected change in the exchange rate.
B) any forward premium or discount is equal to the actual change in the exchange rate
C) the nominal interest rate differential reflects the expected change in the exchange rate.
D) an increase (decrease) in the expected inflation rate in a country will cause a proportionate increase (decrease) in the interest rate in the country.

E) A) and D)
F) All of the above

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Suppose you observe a spot exchange rate of $1.50/€.If interest rates are 5% APR in the U.S.and 3% APR in the euro zone,what is the no-arbitrage 1-year forward rate?


A) €1.5291/$
B) $1.5291/€
C) €1.4714/$
D) $1.4714/€

E) B) and C)
F) A) and D)

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

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

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Suppose you observe a spot exchange rate of $1.50/€.If interest rates are 3% APR in the U.S.and 5% APR in the euro zone,what is the no-arbitrage 1-year forward rate?


A) €1.5291/$
B) $1.5291/€
C) €1.4714/$
D) $1.4714/€

E) A) and D)
F) A) and B)

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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$ = 4%.

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

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A currency dealer has good credit and can borrow either $1,000,000 or €800,000 for one year.The one-year interest rate in the U.S.is i$ = 2% and in the euro zone the one-year interest rate is i€ = 6%.The one-year forward exchange rate is $1.20 = €1.00; what must the spot rate be to eliminate arbitrage opportunities?


A) $1.2471 = €1.00
B) $1.20 = €1.00
C) $1.1547 = €1.00
D) none of the above

E) None of the above
F) A) and B)

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Generally unfavorable evidence on PPP suggests that


A) substantial barriers to international commodity arbitrage exist.
B) tariffs and quotas imposed on international trade can explain at least some of the evidence.
C) shipping costs can make it difficult to directly compare commodity prices.
D) all of the above

E) C) and D)
F) A) and D)

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As of today,the spot exchange rate is €1.00 = $1.25 and the rates of inflation expected to prevail for the next year in the U.S.is 2% and 3% in the euro zone.What is the one-year forward rate that should prevail?


A) €1.00 = $1.2379
B) €1.00 = $1.2623
C) €1.00 = $0.9903
D) $1.00 = €1.2623

E) A) and C)
F) B) and C)

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Suppose that the one-year interest rate is 4.0 percent in the Italy,the spot exchange rate is $1.60/€,and the one-year forward exchange rate is $1.58/€.What must one-year interest rate be in the United States?


A) 2%
B) 2.7%
C) 5.32%
D) None of the above

E) A) and C)
F) C) and D)

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If a foreign county experiences a hyperinflation,


A) its currency will depreciate against stable currencies.
B) its currency may appreciate against stable currencies.
C) its currency may be unaffected-it's difficult to say.
D) none of the above

E) A) and B)
F) B) and C)

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

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A currency dealer has good credit and can borrow either $1,000,000 or €800,000 for one year.The one-year interest rate in the U.S.is i$ = 2% and in the euro zone the one-year interest rate is i€ = 6%.The spot exchange rate is $1.25 = €1.00 and the one-year forward exchange rate is $1.20 = €1.00.Show how to realize a certain profit via covered interest arbitrage.


A) Borrow $1,000,000 at 2%.Trade $1,000,000 for €800,000; invest at i€ = 6%; translate proceeds back at forward rate of $1.20 = €1.00, gross proceeds = $1,017,600.
B) Borrow €800,000 at i€ = 6%; translate to dollars at the spot, invest in the U.S.at i$ = 2% for one year; translate €848,000 back into euro at the forward rate of $1.20 = €1.00.Net profit $2,400.
C) Borrow €800,000 at i€ = 6%; translate to dollars at the spot, invest in the U.S.at i$ = 2% for one year; translate €850,000 back into euro at the forward rate of $1.20 = €1.00.Net profit €2,000.
D) Both c and b

E) All of the above
F) A) and C)

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Studies of the accuracy of paid exchange rate forecasters


A) tend to support the view that "you get what you pay for".
B) tend to support the view that forecasting is easy, at least with regard to major currencies like the euro and Japanese yen.
C) tend to support the view that banks do their best forecasting with the yen.
D) none of the above

E) A) and B)
F) None of the above

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If the exchange rate follows a random walk


A) the future exchange rate is unpredictable.
B) the future exchange rate is expected to be the same as the current exchange rate, St = E(St+1) .
C) the best predictor of future exchange rates is the forward rate Ft = E(St+1|It) .
D) both b and c

E) All of the above
F) A) and B)

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