Reading 18: Currency Exchange Rates-LOS h习题精选 2011, face, interest, forward, percent

土豆妮

Session 4: Economics for Valuation
Reading 18: Currency Exchange Rates

LOS h: Explain interest rate parity, and illustrate covered interest arbitrage.

 

 

Assume the 1 year USD:EUR forward rate is 0.89348, the German interest rate is 3.38 percent, and the U.S. interest rate is 1.90 percent. If interest rate parity (IRP) holds, the USD:EUR spot rate is approximately:

A) 0.91204.

B) 1.56670.

C) 0.88069.

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Interest rate parity is given by:

Forward FCC = Spot FCC × [(1 + r_domestic) / (1 + r_foreign)], or alternatively
Spot FCC = Forward FCC × [(1 + r_foreign) / (1 + r_domestic)] = 0.89348 × (1.0190 / 1.0338) = 0.88069

Note that in this question, the dollar is the foreign currency and the Euro is the domestic currency.

土豆妮

Assume that the domestic nominal rate of return is 4% and the foreign nominal rate of return is 5%. If the current exchange rate is FCC 0.400, the forward rate consistent with interest rate parity is:

A) 0.396.

B) 0.400.

C) 0.318.

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F/S= (1 + r_D) / (1 + r_F) where the currency is quoted as FCC
F = (1.04/1.05)(0.400) = 0.396

土豆妮

Given a forward exchange rate of 5 DC/FC, a spot rate of 5.102 DC/FC, domestic interest rates of 8%, and foreign rates of 10%, which of the following statements is CORRECT based on the approximation formula?

A) Arbitrage opportunities exist.

B) Borrow local currency and lend foreign currency.

C) Arbitrage opportunities do not exist.

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If (r_D ? r_F) is approximately equal to the forward premium, which is (Forward D/F) ? Spot(D/F) / Spot(D/F), then no arbitrage opportunities exist.

0.08 ? 0.10 ? (5 ? 5.102) / 5.102.

-0.02 ? -0.01999.

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Suppose the Argentina peso is at a 1-year forward premium of 4% relative to the Brazilian real and that Argentina’s 1-year interest rate is 7%. If interest rate parity holds, then the Brazilian interest rate is closest to:

A) 6.60%.

B) 3.00%.

C) 11.00%.

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According to interest rate parity the currency with the lower interest rate is expected to appreciate so the Argentina rate of 7% is approximately 4% less than the Brazilian rate of 7 + 4 = 11%.

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Given the following information, what is the forward exchange rate implied by interest rate parity?

• U.S. interest rate = 9%.
• North Korea interest rate = 10%.
• Spot rate = 1.65 KPW/$.

A) 1.665 KPW/$.

B) 0.612 KPW/$.

C) 1.635 KPW/$.

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Forward rate (DC/FC) = Spot Rate (DC/FC) × [(1 + domestic rate) / (1 + foreign rate)],
Forward rate = 1 / 1.65 (KPW/$) × (1.09 / 1.10) = 0.60055 $/KPW, or 1.665 KPW/$.
Alternatively, forward rate = 1.65 (KPW/$) × (1.10 / 1.09) = 1.665 (KPW/$).

土豆妮

The domestic interest rate is 8% and the foreign interest rate is 6%. If the spot rate is 4 domestic units/foreign unit, what should the forward exchange rate be for interest rate parity to hold?

A) 3.930.

B) 4.075.

C) 4.250.

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Using the following interest rate parity equation:

Forward_DC/FC=Spot_DC/FC × [(1 + r_domestic) / (1 + r_foreign )] 

Solving for the forward rate:  Forward_DC/FC = 4 × [(1 + 0.08) / (1 + 0.06)]

= 4(1.08) / (1.06)

= 4(1.01887)

= 4.07547

土豆妮

The domestic interest rate is 7% and the foreign interest rate is 9%. If the forward exchange rate is 5 domestic units per foreign unit, what spot exchange rate is consistent with interest rate parity (IRP)?

A) 4.91.

B) 5.09.

C) 5.72.

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Using the following IRP equation: Forward_FCC = Spot_FCC × [(1 + r_domestic) / (1 + r_foreign )] 

Solving for the spot rate: Spot_FCC = Forward_FCC × [(1 + r_foreign) / (1 + r_domestic)] 

                                    = [(1 + 0.09) / (1 + 0.07)](5)

                                    = (1.09 / 1.07)(5)

                                    = 5.09

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土豆妮

The domestic interest rate is 9% and the foreign interest rate is 7%. If the forward exchange rate is FCC 5.00, what spot exchange rate is consistent with interest rate parity?

A) 4.83.

B) 4.91.

C) 5.09.

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Forward_FCC / Spot_FCC = (1 + r_domestic) / (1 + r_foreign).

Spot_FCC = Forward_FCC (1 + r_foreign) / (1 + r_domestic) = (5.00)(1.07) / (1.09) = 4.908

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土豆妮

One-year interest rates are 7.5% in the U.S. and 6.0% in New Zealand. The current spot exchange rate is NZD:USD 0.5500. If interest rate parity holds, today’s one-year forward rate (NZD:USD) must be closest to:

A) NZD:USD 0.54233.

B) NZD:USD 0.55778.

C) NZD:USD 0.56675.

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Interest rate parity is given by:

Forward_FCC = 0.5500 × (1.075/1.06) = NZD:USD 0.55778

土豆妮

Lance Tuipuloto, CFA, is reviewing interest rate parity for a client meeting on a planned foreign investment. The domestic interest rate is 8% and the foreign interest rate is 6%. If the forward rate is 4.00 domestic units per foreign unit, what should the spot exchange rate be for interest rate parity to hold?

A) 3.98.

B) 4.08.

C) 3.93.

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F/S = (1 + r_domestic) / (1 + r_foreign). Note in this equation exchange rates are quoted as Domestic/Foreign.

S = F (1 + r_F) / (1 + r_D) = (4.00)(1.06) / (1.08) = 3.93