# Forward Exchange Rates

Please complete the following problems: 1- Using exchange rates – (Relative Purchasing Power Parity – The inflation rate in the US is projected at 3 percent per year for the next several years. The New Zealand inflation rate is projected to be 5 percent during that time. Te exchange rate is currently NZ$1.66. Based on relative PPP, what is the expected exchange in two years). Answer the following questions: a- If you have $100, how many euros can you get? b- How much is one euro worth? c- If you have 5 million euros, how many dollars do you have? d- Which is worth more, a New Zealand dollar or a singapore dollar? e- Which is worth more a Mexican peso or a Chilean peso? f- How many Mexican pesos can you get for a euro? What do you call this rate? g- Per unit, whati s the most valuable currency of those listed? The least valuable? 2- Using the Cross Rate – (Relative Purchasing Power Parity – The inflation rate in the US is projected at 3 percent per year for the next several years. The New Zealand inflation rate is projected to be 5 percent during that time. Te exchange rate is currently NZ$1.66. Based on relative PPP, what is the expected exchange in two years). Answer the following questions: a-Which would you rather have, 100 dollars or 100 UK Pound? Why? b-Which would you rather have, 100 Swiss Francs or 100 Uk Pound? Why? c- What is the cross rate for Swiss francs in terms of British pounds? For British pounds in terms of Swiss francs? 3- Forward Exchange Rates – (Relative Purchasing Power Parity – The inflation rate in the US is projected at 3 percent per year for the next several years. The New Zealand inflation rate is projected to be 5 percent during that time. Te exchange rate is currently NZ$1.66. Based on relative PPP, what is the expected exchange in two years). Answer the following questions: a-What is the six month forward rate for the Japanese yen in yen per US dollar? Is the yen selling at a premium or a discount? Explain. b-What is the three month forward rate for Australian dollars in US dollars per Australian dollar? Is the dollar selling at a premium or a discount? Explain. c-What do you think will happen to the value of the dollar relative to the yen and the Australian dollar, based on the information in the figure? Explain 4- Using Spot and Forward Exchange Rates – Suppose the spot exchange rate for the Canadian dollar is Can$1.29 and six month forward rate is Can$1.31. a- Which is worth more, a US dollar or Canadian dollar? b-Assuming absolute PPP holds, what is the cost in the US of an Elkhead beer if the price in Canada is Can$2.50? Why might the beer actually sell at a different price in the US? c- Is the US dollar selling at a premium or a discount relative to the Canadian dollar? d-Which currency is expected to appreciate in value? e-Which country do you think as higher interest rates – the US or Canada? Explain. 5- Cross Rates and Arbitrage – Suppose the Japanese yen exchange is Y114=$1, and the British pound exchange rate is 1 Pound=$1.26. a-What is the cross rate in terms of yen per pound? b-Suppose the cross rate is Y 147=1 Pound. Is there an arbitrage opportunity here? If there is, explain how to take advantage of the mispricing and the potential arbitrage profit. What is you arbitrage profit per dollar used? 6- Interest Rate Parity – Relative Purchasing Power Parity – The inflation rate in the US is projected at 3 percent per year for the next several years. The New Zealand inflation rate is projected to be 5 percent during that time. Te exchange rate is currently NZ$1.66. Based on relative PPP, what is the expected exchange in two years). Answer to the following: Suppose interest rate is parity holds, and the current six month risk free rate in the US is 1.3 percent. What must the six month risk free rate be in the Great Britain? In Japan? In Switzerland? 10-Exchange Rats and Arbitrage – Suppose the spot and six month forward rates on the Norwegian krone are Kr 8.39 and Kr 8.48, respectively. The annual risk free rate is the US is 3.8 percent and the annual risk free rate in Norway is 5.7 percent. a- Is there an arbitrage opportunity here? If so, how would you exploit it? b-What must the six month forward rate be to prevent arbitrage?