PP estimate of the dollar/pound exchange rate is $1.61/£ and the current spot rate is observed to be $1.68/£, on the basis of these two rates you should, viewing the long-run, a. expect the dollar to appreciate against the pound. b. take a "short" position in dollars. c. expect the pound to appreciate against the dollar.

PP estimate of the dollar/pound exchange rate is $1.61/£ and the current spot rate is observed to be $1.68/£, on the basis of these two rates you should, viewing the long-run, a. expect the dollar to appreciate against the pound. b. take a "short" position in dollars. c. expect the pound to appreciate against the dollar.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter4: Exchange Rate Determination

Section: Chapter Questions

Problem 27QA

See similar textbooks

Similar questions

Match each term in Column A with its related definition in Column B. Column A 1. ____________ Spot rate 2. ____________ Currency appreciation 3. ____________ Translation risk 4. ____________ Transaction risk 5. ____________ Exchange rate Column B a. The rate at which one currency can be traded for another currency. b. The possibility that future cash transactions will be affected by changing exchange rates. c. A month ago, 1 U.S. was worth 8.5 Mexican pesos. Today, 1 is worth 9.0 Mexican pesos. The U.S. dollar has undergone what? d. The degree to which a firms financial statements are exposed to exchange rate fluctuation. e. The exchange rate of one currency for another for immediate delivery (today).
PQ 3 In which of the following relationships between the expected future spot rate (E(e)) of a foreign currency and the current forward rate (e fwd) of a foreign currency would a speculator have an incentive to sell foreign currency in the forward market? a. E (e) = e fwd bb. E(e) greater than e fwd c. E(e) less than e fwd d. E (e) = (1/d fwd)
Match each term in Column A with its related definition in Column B.Column A1. Spot rate2. Currency appreciation3. Translation risk4. Transaction risk5. Exchange rateColumn Ba. The rate at which one currency can be traded for another currency.b. The possibility that future cash transactions will be affected by changing exchange rates.c. A month ago, $1 U.S. was worth 8.5 Mexican pesos. Today, $1 is worth 9.0 Mexicanpesos. The U.S. dollar has undergone what?d. The degree to which a firm’s financial statements are exposed to exchange ratefluctuation.e. The exchange rate of one currency for another for immediate delivery (today).
Q1-20 Covered interest parity (CIP) refers to the situation in which: a. interest rates are the same in both currencies. b. spot and forward rates are the same in both currencies. c. the forward rate between the two currencies is equal to the ratio of their returns times the spot rate between the two currencies. d. there is an opportunity for arbitrage whenever prices are sluggish and sticky.
Q.2: By considering the interest rate parity condition, answer each of the following: a. Why is the interest rate parity condition also the equilibrium condition for the exchange rate? b. By using the forward exchange rate, obtain the solution for the current spot equilibrium exchange rate. c. As of 29/03/2021 at 06:00 pm, 1 year forward S/TL rate in Reuters quotations is 9.73 $/TL. Spot interest rates for one-year maturity are 20% and 0.5% in Turkey and the US, respectively. Calculate the equilibrium exchange rate for the spot market in Turkey by using the interest rate parity condition. d. As of the same hour, the market closing rate is 8.15 S/TL. Evaluate the validity of the interest rate parity approach.
Q1-16 In which of the following relationships between the expected future spot rate [E(e)] of a foreign currency and the current forward rate (efwd) of a foreign currency would a speculator have an incentive to sell foreign currency in the forward market? a. E(e) < efwd b. E(e) > efwd c. E(e) = efwd d. E(e) = (1/efwd)
Question 1 Assume the following holds at t=0: 1. The market expects the Dollar to nominally appreciate by 10% against the Euro over the next period 2. Australian expected inflation is 10% over the next period 3. European expected inflation is 5% over the next period 4. The real Dollar per Euro exchange rate is q = 1.3 What is the market's expectation of the real Dollar per Euro exchange rate at t=1? Selected Answer: A. The above information is not enough to calculate qe Answers: A. The above information is not enough to calculate qe B. 1.2325 C. 1.105 D. 1.365 E. 1.495 Question ?
You observe the following quoted money market rates: Bid Ask Spot exchange rate AUD1.185/USD AUD1.189/USD 95-day Forward exchange rate AUD1.341/USD AUD1.349/USD 95-day USD interest rate 5.57% p.a. 6.38% p.a. 95-day AUD interest rate 7.71% p.a. 8.81% p.a. What will your profit (in USD) be 95 days from now if you borrow USD3 million today and invest in Australia and then convert back to USD? In your calculations assume 360 days per year. a. -USD 361,605.85 b. -USD 352,934.10 C. -USD 272,802.68 d. -USD322,300.31 e. None of the options in this question.
Q4 (Exercise 5.19) Suppose the spot $/* exchange rate is 0.008, the 1-year continuously compounded dollar-denominated rate is 5% and the 1-year continuously compounded yen-denominated rate is 1%. Suppose the 1-year forward exchange rate is 0.0084. Explain precisely the transactions you could use (being careful about currency of denomination) to make money with zero initial investment and no risk. How much do you make per yen? Repeat for a forward exchange rate of 0.0083.
Q1-7 If UK interest rates are higher than Japanese interest rates, then the theory of covered interest arbitrage would suggest that, in the £/yen exchange markets, the yen would be at a forward ______ and the pound would ______. a. discount / be at a forward premium b. discount / also be at a forward discount c. premium / also be at a forward premium d. premium / be at a forward discount
Suppose the Japanese yen exchange rate is ¥116 = $1 and the British pound exchange rate is £1 = $1.27. a. What is the cross-rate in terms of yen per pound? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. b. Suppose the cross-rate is ¥156 = £1. What is the arbitrage profit per dollar? Note: Do not round intermediate calculations and round your answer to 4 decimal places, e.g., .1616. a. Cross-rate b. Arbitrage profit per dollar ¥ 147.32 /£ 0.0600
Suppose the Japanese yen exchange rate is ¥116 = $1 and the British pound exchange rate is £1 = $1.27. a. What is the cross-rate in terms of yen per pound? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. b. Suppose the cross-rate is ¥156 = £1. What is the arbitrage profit per dollar? Note: Do not round intermediate calculations and round your answer to 4 decimal places, e.g., .1616. a. Cross-rate b. Arbitrage profit per dollar /£