Question

The “Market” section of the Bloomberg website provides interest rate quotations for numerous currencies. Its address is www.bloomberg.com.

Go to the “Rates and Bonds” section and then click on each foreign country to review its interest rate. Determine the prevailing 1-year interest rate of the Australian dollar, the Japanese yen, and the British pound. Assuming a 2 percent real rate of interest for savers in any country, determine the expected rate of inflation over the next year in each of these countries that is implied by the nominal interest rate (according to the Fisher effect).

What is the approximate expected percentage change in the value of each of these currencies against the dollar over the next year when applying PPP to the inflation level of each of these currencies versus the dollar?

Answer #1

The interest rate for Swiss Franc is iSF=12% and for Japanese
yen is i¥=10%. The expected inflation rate in Switzerland for the
next year is 5%. According to the International Fisher Effect, the
expected inflation rate and real interest rate in Japan for next
year are respectively,
a. 2.0% and 5.0%
b. 2.1% and 4.1%
c. 3.5% and 7.0%
d. 3.1% and 6.7%
e. 7.0% and 7.0%

The interest rate for Swiss Franc is iSF=12% and for
Japanese yen is i¥=10%. The expected inflation rate in
Switzerland for the next year is 5%. According to the International
Fisher Effect, the expected inflation rate and real interest rate
in Japan for next year are respectively,
Select one:
a. 2.1% and 4.1%
b. 3.5% and 7.0%
c. 3.1% and 6.7%
d. 2.0% and 5.0%
e. 7.0% and 7.0%

1)i) Use the following information to answer the next two
questions.
A Japanese investor notices the expected one year inflation rate
in Japan and Mexico is 7% and 5%, respectively. The current spot
rates for yen and pesos are as follows:
$.14/MP, JY100/$What should be the value of pesos in terms of
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b)13.3783 c).0701 d)14.266
ii)Suppose the spot rate at the end of the year is MP.065/JY.
Has...

The country of Daytona, whose currency is the U.S. dollar and
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futures contract on Prescott’s currency (called the pres) is priced
at $.30 per pres.
What is the spot rate of the pres
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Estimate the expected profit or loss if an investor...

3) Suppose that the spot exchange rate S(¥/€) between the yen
and the euro is currently
¥110/€, the 1-year euro interest rate is 6% p.a., and the 1-year
yen interest rate is 3% p.a.
Which of the following statements is MOST likely to be true?
A. The high interest rate currency must sell at a forward premium
when priced in the low
interest rate currency to prevent covered interest arbitrage
Page 3 of 13
B. Real interest parity does not...

8) Carlton, an AAA rated corporate, enters an interest rate swap
on $1,000,000, paying Libor and receiving a fixed rate of 2.56%
annually. The swap is going to last for 4 years. Currently the
4-year Libor is 2.59% on dollars. One year later, Carlton decides
to unwind the swap. What is the NPV of the swap if the three-year
interest rate(Libor) is 3.02% now? Who pays whom?
Select one:
a. -$13,006.61; Carlton pays dealer
b. $855; Dealer pays Carlton
c....

TRUE FALSE. If false CORRECT the wrong
word/words
An increase in the nominal exchange rate ($ per Euro)
will make the dollar less expensive to foreigners
If iD= 10% and iF = 5%, for investors to be indifferent
between holding both one year financial assets, they should expect
expect that over the next year the domestic currency will
appreciate.
A trade deficit implies that that country will require a
surplus in the financial account compensating that
deficit.
An increase in...

1. A firm based in Mexico has found that its growth is
restricted by the limited liquidity of the Mexican capital market.
List the firm’s options for raising money on the global capital
market. Discuss the pros and cons of each option, and make a
recommendation. How might your recommended options be affected if
the Mexican peso depreciates significantly on the foreign exchange
markets over the next two years?
2. Happy Company wants to raise $2 million with debt financing....

Sarah has $2,500 that she wants to invest in a European
certificate of deposit (CD). The spot exchange rate (dollars per
euro) ise$/€=1.13 If the minimum investment
required in the CD is €2,000, does Sarah have sufficient funds? If
not, what is the shortfall (in Euros)? If so, how much surplus does
Sarah have (in euros)? NOTE: This is not a multiple-choice problem.
Show your work to receive credit for the problem.
Suppose the euro/Australian dollar exchange rate increases from...

BLADES, INC. CASE
Assessment of Exchange Rate Exposure
Blades, Inc., is currently exporting roller blades to Thailand
and importing certain components needed to manufacture roller
blades from that country. Under a fixed contractual agreement,
Blades' primary customer in Thailand has committed itself to
purchase 180,000 pairs of roller blades annually at a fixed price
of 4,594 Thai baht (THB) per pair. Blades is importing rubber and
plastic components from various suppliers in Thailand at a cost of
approximately THB2,871 per...

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