Suppose the spot exchange rate for the Canadian dollar is C$1.28 and the six-month forward rate is C$1.33. The U.S. dollar is selling at a _____ relative to the Canadian dollar and the U.S. dollar is expected to _____ relative to the Canadian dollar.
The U.S. dollar is selling at a premium because it is more expensive in the forward market than in the spot market. The U.S. dollar is expected to appreciate in value relative to the Canadian dollar because the U.S. dollar is worth more Canadian dollars in the future than it is today.
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86.
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Based on the following information, the value of the U.S. dollar will _____ with respect to the yen and will _____ with respect to the Canadian dollar.
The U.S. dollar will appreciate against the yen because it will take more of that currency to buy one U.S. dollar. The U.S. dollar will depreciate against the Canadian dollar because it will take less of that currency to buy one U.S. dollar in the future as compared to today.
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87.
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Suppose the Japanese yen exchange rate is ¥114 = $1, and the United Kingdom pound exchange rate is £1 = $1.83. Also suppose the cross-rate is ¥191 = £1. What is the arbitrage profit per one U.S. dollar?
$1 = ¥114
¥114 (£1/¥191) = £0.596859 £0.596859 ($1.83/£1) = $1.0923 Profit = $1.0923 - $1 = $0.0923 |
88.
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Suppose the exchange rates are as follows:
Assume interest rate parity holds and the current six-month risk-free rate in the United States is 3.1 percent. What must the six-month risk-free rate be in Great Britain?
RFC = (£0.5363 - £0.5403)/£0.5403 + 0.31 = 2.36 percent
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