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Reading 18: Currency Exchange Rates - LOS h, (Part 1) ~

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/$.

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