土豆妮

One-year interest rates are 7.5% in the U.S. and 6.0% in New Zealand. The current spot exchange rate is NZD:USD 0.5500. If interest rate parity holds, today’s one-year forward rate (NZD:USD) must be closest to:

A) NZD:USD 0.54233.

B) NZD:USD 0.55778.

C) NZD:USD 0.56675.

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Interest rate parity is given by:

Forward_FCC = 0.5500 × (1.075/1.06) = NZD:USD 0.55778

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) Borrow local currency and lend foreign currency.

C) Arbitrage opportunities do not exist.

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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%.

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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%.

土豆妮

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) 1.665 KPW/$.

B) 0.612 KPW/$.

C) 1.635 KPW/$.

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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/$) × (1.10 / 1.09) = 1.665 (KPW/$).

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 FCC 0.400, the forward rate consistent with interest rate parity is:

A) 0.396.

B) 0.400.

C) 0.318.

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F/S= (1 + r_D) / (1 + r_F) where the currency is quoted as FCC
F = (1.04/1.05)(0.400) = 0.396