Question

Departures from uncovered interest parity (for example in the Yen-USD market) mean that there are riskless profits from the carry trade and that the forward rate is a biased predictor of the future spot exchange rate. True, False or Uncertain?

Answer #1

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...

The three-month interest rate on yen is i¥=1% per
annum; the three-month interest rate on euros is i€=5.5%
per annum. Which one of the following statements is correct?
Select one:
a. Based on the Uncovered Interest Rate Parity, the euro is
expected to appreciate by 4.5% against yen next three months.
b. In a carry trade between euro and yen for three months, the
profit will be ¥0.0315(for each yen borrowed) if the euro has
appreciated 2% against yen in...

The three-month
interest rate on yen is i¥=1% per annum; the three-month
interest rate on euros is i€=5.5% per annum. Which one
of the following statements is correct?
Select one:
a. Based on the Uncovered Interest Rate Parity, the euro is
expected to appreciate by 4.5% against yen next three months.
b. To start a carry trade, a trader can short the euro against
yen in three-month forward contracts.
c. According to the asset market approach, the current spot rate...

(Uncovered interest parity) What is the relationship among the
forward exchange rate, the spot exchange rate, and the interest
rate? Suppose the (1-year) interest rate on bank deposits is 2% in
Canada and 1.5% in United States. If the (1-year) forward US$–C$
exchange rate is C$1.5 per US$ and the spot rate is C$1.2 per US$,
what is the expected US$–C$ exchange rate one year ahead?

Suppose mid-market USD/CAD spot exchange rate is 1.2500 CAD and
one year forward rate is 1.2380 CAD. Also, the risk-free interest
rate is 4% for USD and 3% for CAD. Which of the following value
confirms that interest rate parity exists (Ratio of Forward to
Spot)?

According to uncovered interest rate parity, if the interest
rate in Japan decreases, all else equal, ________.
Select one:
a. Japanese yen is expected to depreciate against U.S dollar
b. U.S. dollar is expected to depreciate against Japanese
yen
c. the exchange rate of Japanese yen against U.S. dollar remains
unchanged
d. U.S. dollar is expected to appreciate against Japanese
yen
If U.S. residents increased their imports of cheese from
Switzerland, the Swiss central bank would need to ________ in...

Princess Cruise Company (PCC) purchased a ship from Mitsubishi
Heavy Industry for 500 million yen payable in one year. The current
spot rate is ¥124/$ and the one-year forward rate is 110¥/$. The
annual interest rate is in Japan is 5% for lending and 6% for
borrowing; and in the United States it is 7% for lending and 8% for
borrowing. The WACC is 7%. PCC can also buy a one-year call option
on yen at the strike price of...

6)The three-month interest rate on yen is i¥=1% per annum; the
three-month interest rate on euros is i€=5.5% per annum. Which one
of the following statements is correct?
Select one:
a. In a carry trade between euro and yen for three months, the
profit will be ¥0.0315(for each yen borrowed) if the euro has
appreciated 2% against yen in the three months.
b. Based on the Uncovered Interest Rate Parity, the euro is
expected to appreciate by 4.5% against yen...

Suppose that you are told that the interest rate on a US
government bond is 3 percent compared to a 2 percent interest rate
on a comparable German bond (i.e. equal risk and maturity). a)
Assuming that uncovered interest parity holds (so that investors
are currently indifferent between the two assets), what would this
imply about the market's expectation of the future value of the
dollar in the exchange market? Explain. (10 points) b) Suppose that
the current spot rate...

2. Suppose that you are told that the interest rate on a US
government bond is 3 percent compared to a 2 percent interest rate
on a comparable German bond (i.e. equal risk and maturity).
a) Assuming that uncovered interest parity holds (so that
investors are currently indifferent between the two assets), what
would this imply about the market's expectation of the future value
of the dollar in the exchange market? Explain. (10 points)
b) Suppose that the current spot...

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