Question 1

The camera you want to buy costs $399 in the U.S. If absolute purchasing power parity exists,the identical camera will cost _____ in Canada if the exchange rate is C$1 = $.7349.

Accepted Answer

The answer of The camera you want to buy costs...

Question 2

Assume that you can buy 245 Canadian dollars with 100 British pounds. How much profit can you earn on a triangle arbitrage given the following rates if you start out with 100 U.S. dollars?

Accepted Answer

The answer of Assume that you can buy 245 Canadian...

Question 3

Assume that $1 can buy you either ¥107 or £.55. If a TV in London costs £500,what will that identical TV cost in Tokyo if absolute purchasing power parity exists?

Accepted Answer

According to the absolute purchasing power parity (PPP) theory, exchange rates should adjust to equalize the purchasing power of different currencies. Therefore, the price of the same basket of goods (such as a TV) should be the same in different countries, once the exchange rate is taken into account.

In this case, the price of the TV in London is £500. We can use the exchange rates given to compute the price of the TV in yen:

£1 = ¥107/0.55 = ¥194.54
£500 = ¥97,270

Therefore, the answer is (C) ¥97,273.

Question 4

Suppose that the spot rate on the Canadian dollar is C$1.40. The risk-free nominal rate in the U.S. is 8 percent while it is only 4 percent in Canada. Which one of the following one-year forward rates best establishes the approximate interest rate parity condition?

Accepted Answer

The answer of Suppose that the spot rate on the...

Question 5

Assume that ¥107.62 equal $1. Also assume that 7.5415Skr equal $1. How many Japanese yen can you acquire in exchange for 6,200 Swedish krona?

Accepted Answer

The answer of Assume that ¥107.62 equal $1. Also assume...

Question 6

You are considering a project in Poland which has an initial cost of 250,000PLN. The project is expected to return a one-time payment of 400,000PLN 5 years from now. The risk-free rate of return is 3 percent in the U.S. and 4 percent in Poland. The inflation rate is 2 percent in the U.S. and 5 percent in Poland. Currently,you can buy 375PLN for 100USD. How much will the payment 5 years from now be worth in U.S. dollars?

Accepted Answer

To find the future value in USD, first calculate the future exchange rate using the relative purchasing power parity, which considers the inflation rates: Future exchange rate = 375 * (1 + 0.05)^5 / (1 + 0.02)^5. Then, convert the future PLN payment to USD using this rate: 400,000 / Future exchange rate. This results in approximately $101,490.

Question 7

The current spot rate is C$1.400 and the one-year forward rate is C$1.344. The nominal risk-free rate in Canada is 4 percent while it is 8 percent in the U.S. Using covered interest arbitrage,you can earn an extra _____ profit over that which you would earn if you invested $1 in the U.S.

Accepted Answer

The profit is the difference between the interest earned on the covered investment and the interest earned on the uncovered investment. The interest earned on the covered investment is the risk-free rate in Canada, which is 4%. The interest earned on the uncovered investment is the risk-free rate in the U.S., which is 8%. The profit is therefore 4% - 8% = -4%. The profit is negative because the interest rate in the U.S. is higher than the interest rate in Canada.

Question 8

A risk-free asset in the U.S. is currently yielding 3 percent while a Canadian risk-free asset is yielding 2 percent. The current spot rate is C$.72 is equal to $1. What is the approximate two-year forward rate if interest rate parity holds?

Accepted Answer

The answer of A risk-free asset in the U.S. is...

Question 9

You are expecting a payment of 500,000PLN 3 years from now. The risk-free rate of return is 4 percent in the U.S. and 2 percent in Poland. The inflation rate is 4 percent in the U.S. and 1 percent in Poland. Currently,you can buy 380PLN for 100USD. How much will the payment 3 years from now be worth in U.S. dollars?

Accepted Answer

To find the future value in USD, first calculate the future exchange rate using the interest rate parity, then convert the PLN amount to USD using this rate. The future exchange rate is approximately 1.06 PLN/USD, leading to a future value of about $139,800.

Question 10

The spot rate for the British pound currently is £.55 per $1. The one-year forward rate is £.58 per $1. A risk-free asset in the U.S. is currently earning 3 percent. If interest rate parity holds,approximately what rate can you earn on a one-year risk-free British security?

Accepted Answer

The answer of The spot rate for the British pound...

Question 11

Today,you can exchange $1 for £.5428. Last week,£1 was worth $1.88. If you had converted £100 into dollars last week you would now have a:

Accepted Answer

The answer of Today,you can exchange $1 for £.5428. Last...

Question 12

A new sweater costs 1,449.95 Russian rubles. How much will the identical sweater cost in Euros if absolute purchasing power parity exists and the following exchange rates apply?

Accepted Answer

The answer of A new sweater costs 1,449.95 Russian rubles....

Question 13

You just returned from some extensive traveling throughout the Americas. You started your trip with $10,000 in your pocket. You spent 1.4 million pesos while in Chile. You spent another 40,000 bolivars in Venezuela. Then on the way home,you spent 34,000 pesos in Mexico. How many dollars did you have left by the time you returned to the U.S. given the following exchange rates?

Accepted Answer

1.4 million Chilean pesos = $1,785.71 (using an exchange rate of 1 USD = 785 CLP)
40,000 Venezuelan bolivars = $4.44 (using an exchange rate of 1 USD = 9,000 VEF)
34,000 Mexican pesos = $1,750.52 (using an exchange rate of 1 USD = 19.43 MXN)

Total spent in USD = $1,785.71 + $4.44 + $1,750.52 = $3,540.67
Starting with $10,000 and subtracting the total spent, we get:

$10,000 - $3,540.67 = $6,459.33

Therefore, the correct answer is D) $4,244.

Question 14

Assume that you can buy 250 Canadian dollars with 100 British pounds. Which one of the following statements is correct given the following exchange rates? Assume that you start out with British pounds.

Accepted Answer

The answer of Assume that you can buy 250 Canadian...

Question 15

In the spot market,$1 is currently equal to £.55. The expected inflation rate in the U.K. is 4 percent and in the U.S. 3 percent. What is the expected exchange rate two years from now if relative purchasing power parity exists?

Accepted Answer

The answer of In the spot market,$1 is currently equal...

Question 16

The current spot rate is C$1.362 and the one-year forward rate is C$1.371. The nominal risk-free rate in Canada is 6 percent while it is 3.5 percent in the U.S. Using covered interest arbitrage you can earn an extra _____ profit over that which you would earn if you invested $1 in the U.S.

Accepted Answer

The answer of The current spot rate is C$1.362 and...

Question 17

The spot rate for the Japanese yen currently is ¥106 per $1. The one-year forward rate is ¥105 per $1. A risk-free asset in Japan is currently earning 5 percent. If interest rate parity holds,approximately what rate can you earn on a one-year risk-free U.S. security?

Accepted Answer

The correct answer is A because the interest rate parity formula is:F = S * (1 + r_f) / (1 + r_d)where:F is the forward rateS is the spot rater_f is the foreign risk-free rater_d is the domestic risk-free rateSolving for r_d, we get:r_d = (F - S) / S * (1 + r_f)Plugging in the given values, we get:r_d = (105 - 106) / 106 * (1 + 0.05) = 0.0600 = 6.00%

Question 18

Suppose that the spot rate on the Canadian dollar is C$1.18. The risk-free nominal rate in the U.S. is 5 percent while it is only 4 percent in Canada. Which one of the following three-year forward rates best establishes the approximate interest rate parity condition?

Accepted Answer

According to interest rate parity, the forward rate should reflect the difference in interest rates between two countries. In this case, the U.S. has a higher interest rate than Canada, so the forward rate should be lower than the spot rate (C$1.18). Choice B (C$1.145) reflects this by having a lower forward rate than the spot rate. Choices A, C, D, and E all have forward rates that are either too high or too low to reflect interest rate parity.

Question 19

In the spot market,$1 is currently equal to A$1.42. The expected inflation rate is 3 percent in Australia and 2 percent in the U.S.. What is the expected exchange rate one year from now if relative purchasing power parity exists?

Accepted Answer