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- Suppose that the interest rates in the U.S. and Germany are equal to 5%, that the forward (one year) value of the € is F$/€ = 1$/€ and that the spot exchange rate is E$/€ = 0.75$/€. Please answer the following questions by explaining all steps of your analysis: Does the covered interest parity condition hold? Why or why not? How could you make a riskless profit without any money tied up assuming that there are no transaction costs in buying and or selling foreign exchange? PLEASE SHOW ALL STEPS7 Explain briefly the main characteristics of the Big Mac price index and why it is considered a better predictor of changes in exchange rates than the implied PPP exchange rate. The BigMac currently costs 21.70 yuan in China and $5.71 in the US and the current exchange rate is S(yuan/$)=0.2. a) Would you say the yuan is correctly valued? b) What is the expected evolution of the exchange rate? c) What is the real exchange rate?If the U.S. economy experiences growth in the future, the property will be worth $50,000,000 and the exchange course of 1 dollar will be 0.83 euro. If the U.S. economy slows down, the property will be worth $40,000,000, but the U.S. dollar will be stronger and worth 0.89 euro. The probability of the U.S. economy to experience growth is 40% while a slow-down will happen with a 60% probability. Estimate your exposure b to the exchange risk. Compute the variance of the dollar value of your property that is attributable to the exchange rate uncertainty. Discuss which strategies you could suggest to your client to manage economic exposure.
- Suppose that you are the CFO of Google with an extra U.S. $20 Million to invest for one year. You are considering the purchase of U.S. T-bills that yield 4% per year. The spot exchange rate is $1.00 = €0.90, and the one-year forward rate is $1.00 = €0.95 . What must the interest rate in the Eurozone (on an investment of comparable risk) be before you are willing to consider investing there instead of the US? a. 9.78% b. 1.56% c. 4.00% d. 5.56%28) If we are using foreign currency for the NPV decision, all we have to do is restate all the ________ in terms of present value and use the current exchange rate. A) salvage value B) foreign incremental cash flow C) domestic incremental cash flow D) None of theseSuppose current one-year interest rate in Europe is 5%, whereas one-year interest rate in the U.S. is 3%. Assume the current spot price of euro (EUR) is $1.10. Answer questions a) and b) below. If the exchange rate movement is consistent with the international Fisher effect (IFE), what will the spot price of EUR in one year be? Consider a trader who does not believe the IFE holds. The trader has decided to borrow $110,000 to invest in EUR-denominated deposits for one year without hedging. Recall the current EUR spot rate is $1.10. If the EUR spot rate in one year turns out to be $1.09, what will be the percentage return on this trading strategy?
- 1. The value of a Bitcoin by the end of 2021 was 60.573€, the inflation in Europe is 6%. The inflation in the world is 7 %, can we predict the value of the Bitcoin in the future? Which factors affect the exchange rate Bitcoin/ €?Show your calculations.Using the UIP equation, assume that the expected future rate (after one year) for euros (in terms of dollars) equals $1.20, while the current spot rate is 1.15. The current interest rate on euro deposits is 2%, and the interest rate on dollar deposits is 3%. Should you invest in the US or in Europe? Neither one In the US In Europe It is indifferentLet a flexible exchange rate system. Assume a current account deficit of $100 billion. Then the capital account balance must be a . a surplus of something more than $100 million. b . a deficit of $100 billion. c . a surplus of $100 billion. d . None of the answers is correct
- Suppose a European call option to buy 1 euro for 1.40 CAD costs 0.08 CAD. The option maturity is in two months and the forward exchange rate for the same maturity is 1.50 CAD per euro. What arbitrage opportunity exists? Explain how you can exploit this opportunity and how much the profit is. (Ignore the time value of money)A bank’s position in OTC options on the dollar-euro exchange rate with a current Delta of -400 and a current Vega of 771. The exchange rate (dollars per euro) is 1.16 and the volatility of the exchange rate is 23.8% per annum. If the volatility of the exchange rate was to suddenly change to 27.4% per annum, what would be your best estimate of the change in the value of the bank’s position in OTC options? Your answer should be a number without any currency sign and if the change is a decrease then there should be negative sign at the front (i.e., if the value goes up by $100 you should write 100, but if it goes down by $100 you should write -100).1 If the current exchange rate between the US and the UK is such that the current price of a pound is $1.20. What is the expected future exchange rate in one year if the US risk free rate is 2% and the UK risk free rate is 2.5% (use 5 decimal places)? 2). Which is a benefit of including international stocks in an investment portfolio? A) Greater ability to diversify B) Political risk exposure C) Exchange rate risk D) Financial risk
