2 Suppose that the current spot exchange rate is €0.8250/S and the three-month forward exchange rate is €0.8132/5. The three-month interest rate is 5.80 percent per annum in the United States and 5.40 percent per annum in France. Assume that you can borrow up to $1,000,000 or €825,000 Show how to realize a certain profit via covered interest arbitrage, assuming that you want to realize profit in terms of U.S. dollars. Also determine the size of your arbitrage profit

Purchasing-power parity (PPP) theory states that exchange rates would need to equalize the prices of goods in any two countries. For the dollar price Activity Frame o be the same in both countries, a U.S. citizen would need to be able to convert $5.74 into exactly GBP 3.29. To find the exchange rate at which hamburger purchasing power is the same in both countries, divide the price in the United States by the price in the United Kingdom: PPP Exchange Rate (U.S. Dollars per British pound) = $5.74 GBP 3.29 = $1.74 per pound The exchange rate that would have equalized the dollar price of a Big Mac in the United States and the Euro area (that is, the PPP exchange rate for Big Macs) is . This change would mean that the euro had against the dollar. If Big Macs were a durable good that could be costlessly transported between countries, which of the following would present an arbitrage opportunity? Check all that apply. Exporting Big Macs from the Euro area to the United States Exporting Big…

Suppose you observe the following exchange rates and interest rates for the USD and JPY:     Bid Ask USD/JPY 105.20 105.95 USD,JPY F,360 104.25 105.10     Trader lends at Trader borrows at I USD ? ? I JPY 1.40% 1.50%   Which answer is closest to the maximum US lending rate that prevents covered interest rate arbitrage?   3.21% 3.16% 3.05% 2.32% 2.42%

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33 The law of volatility states that similar goods or commodities in different countries should remain at the same price after conversion of currencies according to current exchange rates. True or False True False

If a dollar can buy 98 Japanese yen and a British pound costs $1.50, how many yen would it take to buy £1? If a pound of copper costs £1 in Britain, ¥1,600 per pound in Tokyo, and $1.45 per pound in the United States, where is a pound of copper most expensive and where is it least expensive?

9. The relationships between demand and supply of the Olympios Dollar and the exchange rate with the Terranian Credit are given by the following functions: E = 8.75 -0.03Ds E = 0.02Ss- 3.50 where: E = Exchange rate: = price of Olympios dollar (Terranian credits / Olympios dollars) index of demand for Olympios dollar Ss = index of supply of Olympios dollar. Ds a) i) Determine the exchange rate that would prevail under a clean float. ii) Explain what this exchange rate would mean for the balance of payments of Olympios. b) The government of Olympios elects instead to fix the exchange rate with the Terranian credit at E=1.5 credits per dollar. i) Describe what actions the central bank will need to take in the short run to maintain this exchange rate, and the state of the balance of payments. ii) Explain what measures would be required if the government wishes to maintain this exchange rate in the long run.

8. Why exchange rates matter Suppose that you go on vacation to Canada every summer. Last year, the hotel room where you stayed cost C$100 per night, and it costs the same this year. The exchange rate was 1.04 US$/C$ last year, and it is 0.95 US$/C$ this year. This means you will pay per night this year than you paid last year. The U.S. dollar-Canadian dollar exchange rate is essentially the price of a Canadian dollar in terms of U.S. dollars. When this price falls, the Canadian dollar is said to depreciate against the U.S. dollar. Thus, from your analysis, you can conclude that when the Canadian dollar depreciates against the U.S. dollar, Canadian goods and services become expensive for Americans. DeutschAuto is a German automaker that pays most of its production costs in euros. Suppose that in 2007, DeutschAuto's cost of producing a car was €23,000 and that the company sold a car in the United States for $36,000. Further, suppose that the dollar-euro exchange rate rose from 1.35$/ €…

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Problem 5 Swissie Triangular ArbitrageThe following exchange rates are available to you. (You can buy or sell at the stated rates.)1.Mt. Fuji Bank2.Mt. Rushmore Bank3. Mt Blanc Bank1.¥92.00/S2.SF1.02/S3.¥90.00/SFAssume you have an initial SF12,000,000. Can you make a profit via triangular arbitrage?If so, show the steps and calculate the amount of profit in Swiss francs (Swissies).