Question 1

Currently,you can exchange €100 for $124.15.The inflation rate in Europe is expected to be 3.3 percent as compared to 3.1 percent in the U.S.Assuming that relative purchasing power parity exists,what should the exchange rate be five years from now?

Accepted Answer

The answer of Currently,you can exchange €100 for $124.15.The inflation...

Question 2

Assume the spot rate between the UK and the U.S.is £.6789 = $1,while the one-year forward rate is £.6782 = $1.The risk-free rate in the UK is 3.1 percent.The risk-free rate in the U.S.is 2.9 percent.How much profit can you earn for the year on a loan of $1,500 by utilizing covered interest arbitrage?

Accepted Answer

The answer of Assume the spot rate between the UK...

Question 3

Currently,you can exchange €100 for $125.The inflation rate in Europe is expected to be 2.5 percent.In one year,it is expected that €100 can be exchanged for $125.88.Assume relative purchasing power parity exists.What is the expected inflation rate in the U.S.?

Accepted Answer

The answer of Currently,you can exchange €100 for $125.The inflation...

Question 4

Assume the one-year forward rate between the U.S.and Japan is ¥120.38 = $1.A one-year risk-free security in Japan is yielding 4.3 percent while it is 3.8 percent in the U.S.Assume interest rate parity exists.What is the spot rate between the U.S.and Japan?

Accepted Answer

The answer of Assume the one-year forward rate between the...

Question 5

Given the following exchange rates,which of the following currencies are selling at a premium against the dollar? $$\begin{array} { | c | r | r | } 
\hline & \text { USD equiv } & \text { Currency per USD } \
\hline \text { Australia dollar } & .8507 & 1.1755 \
\hline \text { 1-mo forward } & .8489 & 1.1780 \
\hline \text { Japanyen } & .00843 & 118.62 \
\hline \text { 1-mo forward } & .00844 & 118.49 \
\hline \text { Switzerland franc } & 1.0357 & .9655 \
\hline \text { 1-mo forward } & 1.0362 & .9651 \
\hline \text { UK pound } & 1.5649 & .6390 \
\hline \text { 1-mo forward } & 1.5646 & .6391 \
\hline
\end{array}$$

Accepted Answer

The answer of Given the following exchange rates,which of the...

Question 6

The spot rate on the Hong Kong dollar is 7.75.Interest rates in Hong Kong are expected to be 6 percent while they are anticipated to be 3 percent in the U.S.What is the expected exchange rate two years from now?

Accepted Answer

The answer of The spot rate on the Hong Kong...

Question 7

Assume the spot rate between Japan and the U.S.is ¥119.37 = $1,while the one-year forward rate is ¥119.07 = $1.A one-year risk-free security in the U.S.is yielding 4.2 percent.What is the rate of return on a one-year risk-free security in Japan assuming that interest rate parity exists?

Accepted Answer

According to interest rate parity, the rate of return on a one-year risk-free security in Japan should equal the U.S. rate plus the percentage difference between the spot rate and the forward rate:

Japanese rate = U.S. rate + ((Forward rate - Spot rate) / Spot rate)
Japanese rate = 4.2% + ((119.07 - 119.37) / 119.37)
Japanese rate = 4.2% - 0.252%
Japanese rate = 3.948% ≈ 3.94%

Therefore, the answer is B.

Question 8

Assume the current spot rate between the UK and the U.S.is £.6402 per $1.The expected inflation rate in the U.S.is 2.8 percent.The expected inflation rate in the UK is 2.4 percent.If relative purchasing power parity exists,what will the exchange rate be two years from now?

Accepted Answer

£.6402 ×[1 + (.024 -.028)]² = £.6351

Question 9

The spot rate between Canada and the U.S.is C$1.1381 = $1,while the one-year forward rate is Can$1.1407 = $1.The risk-free rate in Canada is 2.4 percent.The risk-free rate in the U.S.is 2.1 percent.How much profit can you earn on a loan of $1,000 by utilizing covered interest arbitrage?

Accepted Answer

The answer of The spot rate between Canada and the...

Question 10

Assume the USD equivalent of the Norwegian krone is .1425.If you have NKr5,500,how much do you have in US dollars?

Accepted Answer

The answer of Assume the USD equivalent of the Norwegian...

Question 11

Assume the one-year forward rate for the Swiss franc is SF.9655 = $1.The spot rate is SF .9702 = $1.The interest rate on a risk-free asset in Switzerland is 3.8 percent.If interest rate parity exists,a one-year risk-free security in the U.S.is yielding _____ percent.

Accepted Answer

The answer of Assume the one-year forward rate for the...

Question 12

A particular set of golf clubs in the U.S.costs $879.According to absolute purchasing power parity,what should the identical set of clubs cost in the UK if the spot rate is £.6421= $1?

Accepted Answer

The answer of A particular set of golf clubs in...

Question 13

A U.S.firm has total assets valued at £318,000 located in London.This valuation did not change from last year.Last year,the exchange rate was £.61 = $1.Today,the exchange rate is £.63 = $1.By what amount did these assets change in value on the firm's U.S.financial statements?

Accepted Answer

The answer of A U.S.firm has total assets valued at...

Question 14

Assume you can currently exchange $100 for ? 80.25.The inflation rate in Europe is expected to be 1.8 percent as compared to 2.4 percent in the U.S.Based on relative purchasing power parity,what should the exchange rate be four years from now?

Accepted Answer

€.8025 ×[1 + (.018 -.024)]⁴= €.7834

Question 15

Assume the one-year forward rate for the British pound is £.6381 = $1.The spot rate is £.6392 = $1.The interest rate on a risk-free asset in the UK is 4.4 percent.If interest rate parity exists,what is the one-year risk-free rate in the U.S.?

Accepted Answer

According to interest rate parity,
(1 + i$_{UK}$) = (1 + i$_{US}$) × (F$/S$), where i$_{UK}$ is the UK interest rate, i$_{US}$ is the US interest rate, F$/S$ is the forward exchange rate, and $ is the spot exchange rate.
Plugging in the given values, we get:
(1 + 0.044) = (1 + i$_{US}$) × (0.6381/0.6392)
Solving for i$_{US}$, we get:
i$_{US}$ = 0.044 × 0.6392/0.6381 - 1 = 0.0458 or 4.58%
Therefore, the one-year risk-free rate in the US is 4.58%.

Question 16

Assume $1 = €.8036 = A$1.1757.What is the cross-rate for Australian dollars in terms of euros?

Accepted Answer

A$1.1757 = €.8036
A$1.4630= €1

Question 17

The spot rate on the Canadian dollar is 1.15.Interest rates in Canada are expected to average 3.2 percent while they are anticipated to be 3.6 percent in the U.S.What is the expected exchange rate three years from now?

Accepted Answer

To calculate the future exchange rate, we can use the interest rate parity formula:

(1 + Canadian interest rate) / (1 + US interest rate) = (Future spot rate) / (Current spot rate)

Plugging in the values given:

(1 + 0.032) / (1 + 0.036) = (Future spot rate) / 1.15

Future spot rate = 1.1363

Therefore, the expected exchange rate three years from now is C$1.1363.

Question 18

A U.S.firm has total assets valued at ? 918,000 located in Germany.This valuation did not change from last year.Last year,the exchange rate was ?
)92 = $1.Today,the exchange rate is ?
)80 = $1.By what amount did these assets change in value for the year on the firm's U.S.financial statements?

Accepted Answer

The answer of A U.S.firm has total assets valued at...

Question 19

The spot rate on the Norwegian kroner is 7.0305.The exchange rate one year from now is expected to be 7.0614 assuming that relative interest rate parity exists.Interest rates in Norway are 3.3 percent.What is the interest rate in the U.S.?

Accepted Answer

Using the formula for relative interest rate parity: (1 + i_Norway) / (1 + i_US) = Forward Rate / Spot Rate. Solving for i_US gives approximately 2.86%.

Question 20

Assume the current spot rate between the UK and the U.S.is £.6379 per $1,the expected inflation rate in the U.S.is 1.9 percent,and the expected inflation rate in the UK is 2.8 percent.If relative purchasing power parity exists,what will the exchange rate be next year?

Accepted Answer

The correct answer is B because the expected exchange rate next year is £.6436/$1. This is calculated using the formula: Expected exchange rate = Current spot rate * (1 + Expected inflation rate in the foreign country) / (1 + Expected inflation rate in the domestic country). In this case, the current spot rate is £.6379/$1, the expected inflation rate in the U.S. is 1.9 percent, and the expected inflation rate in the UK is 2.8 percent. Plugging these values into the formula, we get: Expected exchange rate = £.6379/$1 * (1 + 0.019) / (1 + 0.028) = £.6436/$1.

Quiz 18: International Aspects of Financial Management

Currently,you can exchange €100 for $124.15.The inflation rate in Europe is expected to be 3.3 percent as compared to 3.1 percent in the U.S.Assuming that relative purchasing power parity exists,what should the exchange rate be five years from now?

Currently,you can exchange €100 for $125.The inflation rate in Europe is expected to be 2.5 percent.In one year,it is expected that €100 can be exchanged for $125.88.Assume relative purchasing power parity exists.What is the expected inflation rate in the U.S.?

Assume the one-year forward rate between the U.S.and Japan is ¥120.38 = $1.A one-year risk-free security in Japan is yielding 4.3 percent while it is 3.8 percent in the U.S.Assume interest rate parity exists.What is the spot rate between the U.S.and Japan?

The spot rate on the Hong Kong dollar is 7.75.Interest rates in Hong Kong are expected to be 6 percent while they are anticipated to be 3 percent in the U.S.What is the expected exchange rate two years from now?

Assume the spot rate between Japan and the U.S.is ¥119.37 = $1,while the one-year forward rate is ¥119.07 = $1.A one-year risk-free security in the U.S.is yielding 4.2 percent.What is the rate of return on a one-year risk-free security in Japan assuming that interest rate parity exists?

Assume the current spot rate between the UK and the U.S.is £.6402 per $1.The expected inflation rate in the U.S.is 2.8 percent.The expected inflation rate in the UK is 2.4 percent.If relative purchasing power parity exists,what will the exchange rate be two years from now?

The spot rate between Canada and the U.S.is C$1.1381 = $1,while the one-year forward rate is Can$1.1407 = $1.The risk-free rate in Canada is 2.4 percent.The risk-free rate in the U.S.is 2.1 percent.How much profit can you earn on a loan of $1,000 by utilizing covered interest arbitrage?

Assume the USD equivalent of the Norwegian krone is .1425.If you have NKr5,500,how much do you have in US dollars?

Assume the one-year forward rate for the Swiss franc is SF.9655 = $1.The spot rate is SF .9702 = $1.The interest rate on a risk-free asset in Switzerland is 3.8 percent.If interest rate parity exists,a one-year risk-free security in the U.S.is yielding _____ percent.

A particular set of golf clubs in the U.S.costs $879.According to absolute purchasing power parity,what should the identical set of clubs cost in the UK if the spot rate is £.6421= $1?

A U.S.firm has total assets valued at £318,000 located in London.This valuation did not change from last year.Last year,the exchange rate was £.61 = $1.Today,the exchange rate is £.63 = $1.By what amount did these assets change in value on the firm's U.S.financial statements?

Assume you can currently exchange $100 for ? 80.25.The inflation rate in Europe is expected to be 1.8 percent as compared to 2.4 percent in the U.S.Based on relative purchasing power parity,what should the exchange rate be four years from now?

Assume the one-year forward rate for the British pound is £.6381 = $1.The spot rate is £.6392 = $1.The interest rate on a risk-free asset in the UK is 4.4 percent.If interest rate parity exists,what is the one-year risk-free rate in the U.S.?

Assume $1 = €.8036 = A$1.1757.What is the cross-rate for Australian dollars in terms of euros?

The spot rate on the Canadian dollar is 1.15.Interest rates in Canada are expected to average 3.2 percent while they are anticipated to be 3.6 percent in the U.S.What is the expected exchange rate three years from now?

A U.S.firm has total assets valued at ? 918,000 located in Germany.This valuation did not change from last year.Last year,the exchange rate was ? ) 92 = $1.Today,the exchange rate is ? ) 80 = $1.By what amount did these assets change in value for the year on the firm's U.S.financial statements?

The spot rate on the Norwegian kroner is 7.0305.The exchange rate one year from now is expected to be 7.0614 assuming that relative interest rate parity exists.Interest rates in Norway are 3.3 percent.What is the interest rate in the U.S.?

Assume the current spot rate between the UK and the U.S.is £.6379 per $1,the expected inflation rate in the U.S.is 1.9 percent,and the expected inflation rate in the UK is 2.8 percent.If relative purchasing power parity exists,what will the exchange rate be next year?