Topic 3

Question 1

If the 180-day forward rate is .6498 and the spot rate is .6491 for £/$, then the dollar expected to ____ vs. the pound?

A. appreciate
B. depreciate
C. Stay the same
D. It is impossible to say

Answer 1

A. appreciate

Question 2

What is the 180-day forward premium for £/$ if the spot is .6491 and the 6-month forward rate is .6498?

A. .2157%
B. 2.157%
C. .1078%
D. .0645
E. None of the above

Answer 2

A. .2157%

Question 3

What is the 90-day forward premium for £/$ if the spot is .6498 and the 3-month forward rate is .6491?

A. .2157%
B. -.0043
C. -.4309%
D. Both b & c
E. None of the above

Answer 3

D. Both b & c

Question 4

The spot is $1.54/£ while the 1-month forward rate is $1.55. The pound is expected to ______ vs. the dollar.

A. Depreciate
B. Appreciate
C. Stay the same
D. Can’t say

Answer 4

B. Appreciate

Question 5

The spot is $1.54/£ while the 1-month forward rate is $1.55. You agree to sell £1 million at the 1-month rate. Next month the spot rate is $1.50/£, what are your profits?

A. $5,000
B. £50,000
C. $50,000
D. -$50,000

Answer 5

C. $50,000

Question 6

The euro is trading at $1.3092 today and the 6-month forward rate is $1.3107. The pound is trading at $1.5405 and the 6-month forward is $1.5389. The poundis expected to

A. Appreciate by €.0026
B. Depreciate by €.0026
C. Appreciate by €.0052
D. Depreciate by €.0052

Answer 6

B. Depreciate by €.0026

Question 7

The S($/£) = 1.50 and F($/£) = 1.47 while $i=5% and £i=6%. Does IRP hold?

A. Yes, IRP holds
B. No, borrow dollars
C. No, borrow pounds

Answer 7

C. No, borrow pounds

Question 8

The S($/£) = 1.50 and F($/£) = 1.53 while $i=5% and £i=6%. Does IRP hold?

A. Yes, IRP holds
B. No, borrow dollars
C. No, borrow pounds

Answer 8

B. No, borrow dollars

Question 9

Suppose you observe a spot exchange rate of $1.50/€. If interest rates are 5% APR in the U.S. and 3% APR in the euro zone, what is the no-arbitrage 1-year forward rate?

A. €1.5291/$
B. $1.5291/€
C. €1.4714/$
D. $1.4714/€

Answer 9

B. $1.5291/€

Question 10

Suppose you observe a spot exchange rate of $1.50/€. If interest rates are 5% APR in the U.S. and 3% APR in the euro zone, what is the no-arbitrage 2-year forward rate?

A. $1.5588/€
B. $1.5291/€
C. $1.5117/€
D.$1.5891/€
E. $1.4657/€

Answer 10

A. $1.5588/€

Question 11

You decide to try the “carry trade”. The one-year interest rate is 1% in the U.S. and 5% in France, while the spot rate is $1.20/€. You borrow $1 million for one year. If the spot rate in one year is $1.18/€, what are your profits?

A. $22,500
B. $32,599
C. $833,333
D. -$22,500

Answer 11

A. $22,500

Question 12

As of today, the spot exchange rate is €1.00 = $1.25 and the rates of inflation expected to prevail for the next year in the U.S. is 2% and 3% in the euro zone. What is the one-year forward rate that should prevail?

A. €1.00 = $1.2379
B. €1.00 = $1.2623
C. €1.00 = $0.9903
D. $1.00 = €1.2623

Answer 12

A. €1.00 = $1.2379

Question 13

If a Big Mac costs 75 RUB in Moscow and $4.33 in NY, is the RUB over/under-valued if spot rate is RUB 32.77/$? Percent over/under?

A. Overvalued by 47%
B. Undervalued by 47%
C. Overvalued by 22%
D. Undervalued by 22%
E. None of the above

Answer 13

B. Undervalued by 47%