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Ch06 Problem Sets

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22 views

Ch06 Problem Sets

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siddev12344321
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Instructor: Amy Ho

Chapter 6 International Parity Relationships and Forecasting Exchange Rates

1. An economic analysis firm has just published projected inflation rates for the U.S. and
Germany for the next five years. U.S. inflation is expected to be 10% per year, and German
inflation is expected to be 4% per year. If the current exchange rate is $0.95/€, what should
the exchange rates be for the next five years
Answer:

2. If expected inflation is 100 percent and the real required return is 5 percent, what will the
nominal interest rate be according to the Fisher effect?
Answer:

3. In July, the one-year interest rate is 12% on British pounds and 9% on U.S. dollars. If the
current exchange rate is $1.63:£1, what is the expected spot exchange rate in one year?
Answer:

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Instructor: Amy Ho

4. If the Swiss franc is $0.68 on the spot market and the 180-day forward rate is $0.70, what
is the annualized interest rate in the U.S. over the next six months? The annualized interest
rate in Switzerland is 2%.

Answer:

۞ Suggested Exercises - End-of-Chapter 6 Problems: #8, 12

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Instructor: Amy Ho

[EOC Problem #8 – CFA Problem] Omni Advisors, an international pension fund manager,

uses the concepts of purchasing power parity (PPP) and the International Fisher Effect (IFE)

to forecast spot exchange rates. Omni gathers the financial information as follows:

Base price level 100

Current U.S. price level 105

Current South African price level 111

Base rand spot exchange rate $0.175

Current rand spot exchange rate $0.158

Expected annual U.S. inflation 7%

Expected annual South African inflation 5%

Expected U.S. one-year interest rate 10%

Expected South African one-year interest rate 8%

Calculate the following exchange rates (ZAR and USD refer to the South African rand and
U.S. dollar, respectively).

a. The current ZAR spot rate in USD that would have been forecast by PPP.

b. Using the IFE, the expected ZAR spot rate in USD one year from now.

c. Using PPP, the expected ZAR spot rate in USD four years from now.

Answer:

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Instructor: Amy Ho

[EOC Problem #12 – CFA Problem] James Clark is a foreign exchange trader with Citibank.

He notices the following quotes.

Spot exchange rate SFr1.2051/$

Six-month forward exchange rate SFr1.1922/$

Six-month $ interest rate 2.5% per year

Six-month SFr interest rate 2.0% per year

a. Is the interest rate parity holding? You may ignore transaction costs.

b. Is there an arbitrage opportunity? If yes, show what steps need to be taken to make

arbitrage profit. Assuming that James Clark is authorized to work with $1,000,000,

compute the arbitrage profit in dollars.

Answer:

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