Reading 19: Foreign Exchange Parity Relations - LOS L ～ Q expected, exchange, following, available, him

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Q7. Now, suppose Bowman has the following information available to him: the current spot exchange rate for Indian Rupees is $0.02046. Inflation over the next 5 years is expected to be 3% in the U.S. and 5% in India. Bowman must calculate the U.S. Dollar/Indian Rupee expected future spot exchange rate in 5 years implied by purchasing power parity (PPP). The answer is:

A)   $0.02250.

B)   $0.01858.

C)   $0.02010.

Q8. Bowman routinely calculates the expected spot rate for the Japanese Yen per U.S. dollar. He knows that the current spot exchange rate is 189.76 Yen/USD. He is also aware that the interest rates in Japan, Great Britain, and the U.S. are 8%, 4%, and 5% respectively. Calculate the expected spot rate for Yen/USD in a one year period.

A)   187.95 Yen/USD.

B)   184.49 Yen/USD.

C)   195.18 Yen/USD.

Q9. China’s nominal interest rates, along with the inflation rate, have been declining over the past five years as a result of governmental efforts to privatize state-owned enterprises and monetary austerity controls over its economy. Over the long run, the Chinese yuan would be expected to:

A)   depreciate relative to countries with high interest rates.

B)   appreciate relative to countries with low inflation.

C)   appreciate relative to countries with high interest rates.

Q10. Willie Muller is a senior loan officer with a money center bank in New York. He has many multinational clients, including several who do a large percentage of their business with customers in Germany. Recent political developments in Europe have led to uncertainty regarding future exchange rates. The risk management team at Muller’s bank is concerned about the potential impact that increased volatility in exchange rates may have on his clients’ operations. The bank’s loans are denominated in U.S. dollars; however, these particular clients conduct their operations primarily in Euros. Since the clients bear the exchange rate risk, Muller and his risk management team are concerned about their clients’ exposure and the implications to the bank. Any negative impact to earnings could ultimately impair the ability of his clients to repay their outstanding loans. Muller has been asked to assess the bank’s exposure to Muller’s customers under a variety of economic scenarios.

In order to better understand his clients’ foreign exchange risk, Muller undertakes a review of the factors that underlie exchange rates including the principle of purchasing power parity (PPP). To do so, he must factor in the interrelationships between exchange rates, interest rates, and inflation rates. Also of importance are growth projections for the German economy, and how these might be affected by government policy. Muller begins to gather information that he believes may be useful in his analysis. He discovers that over the past two years, the price level in the U.S. has increased from 100 to 112 while the price level in Germany has increased from 100 to 104. Also, he notes that the current $/

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答案和详解如下：

Q7. Now, suppose Bowman has the following information available to him: the current spot exchange rate for Indian Rupees is $0.02046. Inflation over the next 5 years is expected to be 3% in the U.S. and 5% in India. Bowman must calculate the U.S. Dollar/Indian Rupee expected future spot exchange rate in 5 years implied by purchasing power parity (PPP). The answer is:

A)   $0.02250.

B)   $0.01858.

C)   $0.02010.

Correct answer is B)

The PPP assumption is that the future spot exchange rate will change exactly as the inflation rates affect the values of each currency. For the computation, raise the U.S. inflation rate to the 5th power (because of 5 years) and divide it by the Indian inflation rate raised to the 5th power. Then multiply the result by the spot exchange rate. ((1.03)⁵ / (1.05)⁵) × 0.02046 = $0.01858.

Q8. Bowman routinely calculates the expected spot rate for the Japanese Yen per U.S. dollar. He knows that the current spot exchange rate is 189.76 Yen/USD. He is also aware that the interest rates in Japan, Great Britain, and the U.S. are 8%, 4%, and 5% respectively. Calculate the expected spot rate for Yen/USD in a one year period.

A)   187.95 Yen/USD.

B)   184.49 Yen/USD.

C)   195.18 Yen/USD.

Correct answer is C)

The exact methodology of the covered interest rate parity (IRP) is:

expected spot rate in one period (FC/DC) = spot rate today (FC/DC) × [(1 + R_FC) / (1 + R_DC)].

Setting up this equation gives us E(S₁) = 189.76 Yen/USD × (1.08 / 1.05) = 195.18 Yen/USD.

Q9. China’s nominal interest rates, along with the inflation rate, have been declining over the past five years as a result of governmental efforts to privatize state-owned enterprises and monetary austerity controls over its economy. Over the long run, the Chinese yuan would be expected to:

A)   depreciate relative to countries with high interest rates.

B)   appreciate relative to countries with low inflation.

C)   appreciate relative to countries with high interest rates.

Correct answer is C)

According to uncovered interest rate parity, countries with high nominal interest rates should experience a depreciation of their currency in the long run, while countries with low nominal interest rates should experience an appreciation of their currency in the long run.

Q10. Willie Muller is a senior loan officer with a money center bank in New York. He has many multinational clients, including several who do a large percentage of their business with customers in Germany. Recent political developments in Europe have led to uncertainty regarding future exchange rates. The risk management team at Muller’s bank is concerned about the potential impact that increased volatility in exchange rates may have on his clients’ operations. The bank’s loans are denominated in U.S. dollars; however, these particular clients conduct their operations primarily in Euros. Since the clients bear the exchange rate risk, Muller and his risk management team are concerned about their clients’ exposure and the implications to the bank. Any negative impact to earnings could ultimately impair the ability of his clients to repay their outstanding loans. Muller has been asked to assess the bank’s exposure to Muller’s customers under a variety of economic scenarios.

In order to better understand his clients’ foreign exchange risk, Muller undertakes a review of the factors that underlie exchange rates including the principle of purchasing power parity (PPP). To do so, he must factor in the interrelationships between exchange rates, interest rates, and inflation rates. Also of importance are growth projections for the German economy, and how these might be affected by government policy. Muller begins to gather information that he believes may be useful in his analysis. He discovers that over the past two years, the price level in the U.S. has increased from 100 to 112 while the price level in Germany has increased from 100 to 104. Also, he notes that the current $/

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