Q1. Assume the 1 year Euro to U.S. Dollar (USD) 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 Euro/USD spot rate is approximately:

A)   0.91204.

B)   0.88069.

C)   1.56670.

Q2. 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 0.400 D/F, the forward rate consistent with interest rate parity is:

A)   0.400.

B)   0.318.

C)   0.396.

Q3. 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.

Q4. 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%.

Q5. 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)   0.612 KPW/$.

B)   1.635 KPW/$.

C)   1.665 KPW/$.

答案和详解如下：

Q1. Assume the 1 year Euro to U.S. Dollar (USD) 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 Euro/USD spot rate is approximately:

A)   0.91204.

B)   0.88069.

C)   1.56670.

Correct answer is B)

Interest rate parity is given by:

Forward (DC/FC) = Spot (DC/FC) × [(1 + r_domestic) / (1 + r_foreign)], or alternatively
Spot (DC/FC) = Forward (DC/FC) × [(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.

Q2. 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 0.400 D/F, the forward rate consistent with interest rate parity is:

A)   0.400.

B)   0.318.

C)   0.396.

Correct answer is C)

F/S= (1 + r_D) / (1 + r_F) where rates are listed as DC/FC
F = (1.04/1.05)(0.400) = 0.396

Q3. 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.

Correct answer is C)

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.

Q4. 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%.

Correct answer is C)

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%.

Q5. 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)   0.612 KPW/$.

B)   1.635 KPW/$.

C)   1.665 KPW/$.

Correct answer is C)

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/$) × (1.10 / 1.09) = 1.665 (KPW/$).