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) 4.250.

C) 4.075.

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) 4.250.

C) 4.075.

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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

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) Arbitrage opportunities do not exist.

C) Borrow local currency and lend foreign currency.

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) Arbitrage opportunities do not exist.

C) Borrow local currency and lend foreign currency.

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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.

土豆妮

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%.

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

A) 0.400.

B) 0.318.

C) 0.396.

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

A) 0.400.

B) 0.318.

C) 0.396.

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

土豆妮

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) 1.56670.

C) 0.88069.

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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.