Financial Markets and Institutions (2-downloads)

9. The Brazilian real is trading at 0.375 real per U.S. dol-

lar. What is the U.S. dollar per real exchange rate?

10. The Mexican peso is trading at 10 pesos per dollar.

If the expected U.S. inflation rate is 2% while the

expected Mexican inflation rate is 23% over the next

year, what is the expected exchange rate in one year?

11. The current exchange rate between the United States

and Britain is $1.825 per pound. The six-month for-

ward rate between the British pound and the U.S. dol-

lar is $1.79 per pound. What is the percentage

difference between current six-month U.S. and

British interest rates?

12. The current exchange rate between the Japanese yen

and the U.S. dollar is 120 yen per dollar. If the dollar

is expected to depreciate by 10% relative to the yen,

what is the new expected exchange rate?

13. If the price level recently increased by 20% in

England while falling by 5% in the United States, how

much must the exchange rate change if PPP holds?

Assume that the current exchange rate is 0.55 pounds

per dollar.

14. A one-year CD in Europe is currently paying 5%, and

the exchange rate is currently 0.99 euros per dollar.

If you believe the exchange rate will be 1.04 euros per

dollar one year from now, what is the expected return

in terms of dollars?

15. Short-term interest rates are 2% in Japan and 4% in the

United States. The current exchange rate is 120 yen per

dollar. What is the expected forward exchange rate?

16. Short-term interest rates are 2% in Japan and 4% in

the United States. The current exchange rate is 120

yen per dollar. If you can enter into a forward

exchange rate of 115 yen per dollar, how can you arbi-

trage the situation?

17. The interest rate in the United States is 4%, and the

euro is trading at 1 euro per dollar. The euro is

expected to depreciate to 1.1 euros per dollar.

Calculate the interest rate in Germany.

W E B   E X E R C I S E S

The Foreign Exchange Market

1. The Federal Reserve maintains a Web site that lists

the exchange rates between the U.S. dollar and many

other currencies. Go to