Reading 18: Currency Exchange Rates - LOS h, (Part 1) ～ Q domestic, exchange, interest, foreign, forward

mayanfang1

Q6. 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.

Q7. 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)   5.72.

C)   5.09.

Q8. The domestic interest rate is 9% and the foreign interest rate is 7%. If the forward exchange rate is 5 domestic units per foreign unit, what spot exchange rate is consistent with interest rate parity?

A)   4.91.

B)   4.83.

C)   5.09.

Q9. One-year interest rates are 7.5% in the U.S. and 6.0% in New Zealand. The current spot exchange rate is $0.55/NZD. If interest rate parity holds, today’s one-year forward rate ($/NZD) must be:

A)    $0.54233/NZD.

B)    $0.55778/NZD.

C)    $0.56675/NZD.

Q10. The domestic interest rate is 9% and the foreign interest rate is 7%. If the forward rate is 5 domestic units per foreign unit, what should the spot exchange rate be for interest rate parity to hold?

A)   4.83.

B)   4.91.

C)   5.09.

mayanfang1

答案和详解如下：

Q6. 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.

Correct answer is C)

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

Q7. 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)   5.72.

C)   5.09.

Correct answer is C)

Using the following IRP equation: Forward_DC/FC=Spot_DC/FC × [(1 + r_domestic) / (1 + r_foreign )] 

Solving for the spot rate: Spot_DC/FC = Forward_DC/FC × [(1 + r_foreign) / (1 + r_domestic)] 

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

                                    = (1.09 / 1.07)(5)

                                    = 5.09

Q8. The domestic interest rate is 9% and the foreign interest rate is 7%. If the forward exchange rate is 5 domestic units per foreign unit, what spot exchange rate is consistent with interest rate parity?

A)   4.91.

B)   4.83.

C)   5.09.

Correct answer is A)

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) = (5)(1.07) / (1.09) = 4.908

Q9. One-year interest rates are 7.5% in the U.S. and 6.0% in New Zealand. The current spot exchange rate is $0.55/NZD. If interest rate parity holds, today’s one-year forward rate ($/NZD) must be:

A)    $0.54233/NZD.

B)    $0.55778/NZD.

C)    $0.56675/NZD.

Correct answer is B)

Interest rate parity is given by:

Forward (DC/FC) = $0.55/NZD × (1.075/1.06) = $0.55778/NZD

Q10. The domestic interest rate is 9% and the foreign interest rate is 7%. If the forward rate is 5 domestic units per foreign unit, what should the spot exchange rate be for interest rate parity to hold?

A)   4.83.

B)   4.91.

C)   5.09.

Correct answer is B)         

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) = (5)(1.07) / (1.09) = 4.908

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