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Practice Question 2

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Practice Question 2

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Practice Question 2

1. If the Canadian dollar is equal to $0.86 and the Brazilian real is equal to $0.28, what is the
value of the Brazilian real in terms of Canadian dollars?
A. about .3256 reals
B. about .3568 reals
C. about 1.2 reals
D. about 1.5 reals

2. If the Japanese yen was worth $.0035 six months ago and is worth $.0045 today, how much
has the yen appreciated or depreciated?
A. appreciated; about 29%
B. appreciated; about 25%
C. depreciated; about 20%
D. depreciated; about 18%

3. Suppose annual inflation rates in the US and Cambodia are expected to be 5% and 90%,
respectively over the next year. If the current spot rate for the Cambodian riel (KHR) is
3342.62 riels per dollar, then the best estimate of the riel's future spot rate one year from now
is:
A. $6053.27
B. $6350.99
C. $3342.62
D. $6685.24

Use the following information to answer the next three questions.


Assume the following: you have $10,000 to invest; the current spot rate of British pounds is
$1.800; the 90-day forward rate of the pound is $1.780; the annual interest rate in the US is
4%; the annual interest rate in the UK is 6%.

4. Where would you invest your $10,000 to maximize your yield with no foreign exchange
risk?
A. in the United States
B. in the United Kingdom
C. does not make any difference
D. in Germany

5. Given the US interest rate, the UK interest rate, and the spot rate, what would be an
equilibrium forward exchange quotation?
A. 1.800
B. 1.780
C. 1.809
D. 1.905

6. Given the spot rate, the forward rate, and the US interest rate, what is the equilibrium UK
interest rate?
A. 6.0%
B. 8.9%
C. 4.0%
D. 8.4%
7. Suppose that the one-year interest rate is 5.0 percent in the United States and 3.5 percent in
Germany, and the one-year forward exchange rate is $1.16/€. What must the spot exchange
rate be?
A. $1.1768/€
B. $1.1434/€.
C. $1.12/€
D. None of the above

8. You are an international currency trader with access to the following spot exchange rates:
• USD/EUR = 1.10
• USD/JPY = 145.00
In the interbank market, you observe the following cross-exchange rate:
• EUR/JPY = 130.00
Task:
1. Determine the implied EUR/JPY cross-exchange rate based on the USD/EUR and
USD/JPY rates.
2. Compare the implied EUR/JPY rate to the market rate of 130.00 and identify whether
an arbitrage opportunity exists.
3. If an arbitrage opportunity exists, outline a series of transactions to exploit it. Assume
you start with €1,000,000 and show your calculations for:
o The total JPY earned.
o The profit in EUR after reversing the arbitrage transactions.

9. Spot exchange rates available to you are:


• USD/CHF = 0.91
• GBP/USD = 1.28
• GBP/CHF = 1.16
Task:
1. Calculate the implied GBP/CHF rate based on GBP/USD and USD/CHF.
2. Compare this rate to the actual GBP/CHF rate of 1.16. Determine if there is an
arbitrage opportunity.
3. If an arbitrage opportunity exists, detail the transactions required to exploit it starting
with $2,000,000. Calculate the profit in USD.

10. You are provided with the following spot and forward exchange rates:
Spot Rates
• USD/EUR = 1.10
• USD/JPY = 145.00
6-Month Forward Rates
• USD/EUR Forward = 1.12
• USD/JPY Forward = 147.50
The interbank 6-month forward rate for EUR/JPY is quoted as 132.50.
Task
1. Calculate the implied EUR/JPY 6-month forward rate using the given USD/EUR and
USD/JPY forward rates.
2. Compare the implied forward rate to the interbank EUR/JPY forward rate of 132.50.
Identify if an arbitrage opportunity exists.
3. If an arbitrage opportunity exists, describe the steps to exploit it, assuming you start
with €1,000,000.
4. Calculate the total profit in EUR after the arbitrage transactions. Assume no
transaction costs and sufficient market liquidity.

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