Question 1

The forward expectations parity states that:

Accepted Answer

The forward expectations parity states that any forward premium or discount is equal to the expected change in the exchange rate. This means that if the forward rate is higher than the spot rate, the currency is said to be trading at a forward premium, which implies that traders expect the future exchange rate to be higher than the current rate. Conversely, if the forward rate is lower than the spot rate, the currency is trading at a discount, indicating that traders expect the future exchange rate to be lower than the current rate. Hence, the forward premium or discount is equal to the expected change in the exchange rate.

Question 2

PPP does not hold well because of the following except:

Accepted Answer

The statement in option D is true and does not contradict the concept of PPP. PPP holds that, over the long term, prices of goods and services in different countries will converge to equalize the prices when measured in a common currency. The CPI index is calculated using the same basket of goods, which is a key component of the PPP theory. The other options all represent factors that can cause deviations from PPP.

Question 3

Assume the current $/£ exchange rate is 1.7 $/£ and 1-year forward exchange rate is 1.68$/£.The risk-free interest rates at which you can invest in US and UK are 4% and 6% respectively.However,since you do not have a very good credit rating,you can borrow funds only at higher rates.Namely,you can borrow $s at 5% and you can borrow £s at 7%.Is there an arbitrage opportunity?

Accepted Answer

The answer of Assume the current $/£ exchange rate is...

Question 4

Suppose that the two-months interest rate is 6.0 percent per annum in the United States and 7.0 percent per annum in Germany,and that the spot exchange rate is $1.12/€ and the forward exchange rate,with two-months maturity,is $1.10/€.Assume that an arbitrager can borrow up to $1,000,000 or €892,857.
a)What kind of arbitrage is possible?
b)Determine the arbitrage profit that can be made.
c)What would the forward rate have to be so that there would be no arbitrage opportunity?

Accepted Answer

The answer of Suppose that the two-months interest rate is...

Question 5

The 9-months inflation rate in Great Britain is expected to be 4% p.a.,and the 9-months inflation rate in Switzerland is predicted to be 6% p.a.Assume that the parity conditions hold.
a)By what percentage rate do you expect the Swiss franc to appreciate (depreciate)with respect to the British pound over the next nine months,based on purchasing power parity?
b)If the spot rate is pound 0.5/SF,what is the expected spot exchange rate between the Swiss franc and the British pound in nine months?

Accepted Answer

The answer of The 9-months inflation rate in Great Britain...

Question 6

Assume the current $/£ exchange rate is 1.7 $/£ and 1-year forward exchange rate is 1.68$/£.The risk-free interest rates in US and UK are 4% and 6% respectively.Is there an arbitrage opportunity?

Accepted Answer

The answer of Assume the current $/£ exchange rate is...

Question 7

You have the following information:
 $\begin{array}{ll}
\text { today's spot } & \$ .6850 / \mathrm{CS} \
6 \text { months forward rate } & \$ .7100 / \mathrm{C \$}
\end{array}$
expected inflation rate in the U.S.: $ 4 \% $ p.a.
 expected inflation rate in Canada: $ 2 \% $ p.a.
 nominal interest rate in the U.S: $ 6 \% $ p.a. You are asked to forecast the spot exchange rate between the Canadian dollar and the U.S.dollar in six months.
a)What is your forecast based on purchasing power parity?
b)What is your forecast based on the forward expectations parity?
c)Based on the Fisher effect,what should be the real interest rate in Canada?
d)Why are the two forecasts in a and b different?

Accepted Answer

The answer of You have the following information:
 \(\begin{array}{ll}
\text {...

Question 8

Suppose that the two-months interest rate is 8.0 percent per annum in the Canada and 7.0 percent per annum in France,and that the spot exchange rate is $1.50/€ and the forward exchange rate,with one-year maturity,is $1.50/€.Assume that an arbitrager can borrow up to $1,000,000 or €666,666.
a)What kind of arbitrage is possible?
b)Determine the arbitrage profit that can be made.
c)What would the French interest rate have to be so that there would be no arbitrage opportunity?

Accepted Answer

The answer of Suppose that the two-months interest rate is...

Question 9

Canada's competitive position will:

Accepted Answer

When the dollar appreciates more than is warranted by PPP, Canadian products become more expensive for foreign buyers, reducing demand and exports. This, in turn, weakens Canada's competitive position in the global market. Therefore, choice C is the best answer.

Question 10

The 9-months inflation rate in Great Britain is expected to be 4% p.a.,and the 9-months inflation rate in Switzerland is predicted to be 6% p.a.The real interest rate is 3% in Great Britain.Assume that the parity conditions hold.
a)What is the nominal interest rate in Switzerland?
b)What is the nine-month forward rate of the Swiss franc with respect to the British pound?
c)If the inflation rates are expected to stay unchanged over the next two years,what is the expected spot exchange rate between the British pound and the Swiss franc in two years?

Accepted Answer

The answer of The 9-months inflation rate in Great Britain...

Quiz 5: International Parity Relationships and Forecasting Foreign Exchange Rates

The forward expectations parity states that:

PPP does not hold well because of the following except:

Assume the current $/£ exchange rate is 1.7 $/£ and 1-year forward exchange rate is 1.68$/£.The risk-free interest rates in US and UK are 4% and 6% respectively.Is there an arbitrage opportunity?

Canada's competitive position will: