Question

1. The average price of a Boone’s Farm bottle of wine is $2.00 in the US. The same wine in Japan is priced at ¥300. Assuming no transportation costs or tariffs (or other extra costs), and that the current exchange rate is ¥135=$1, then we conclude that:

1. The Yen is overvalued by 100%
2. The Yen is undervalued by 25%
3. The Yen is overvalued by 10%
4. The US Dollar is undervalued by 135%
5. All the above

3. The exchange rate between the dollar and the euro is $1.20=€1; the rate between the dollar and the yen is $0.0125/¥. What is the exchange rate between the euro and the yen?

1. €1=¥80
2. ¥96=€1
3. €1=¥0.0104
4. €0.0104=¥1
5. All the above

4. The interest rate on one-year Japanese government securities is 1.5%. The real rate of interest in Japan is 2%. According to the Fisher Effect, the expected inflation rate in Japan is:

1. 0.5%
2. 3.5%
3. -0.5%
4. -3.5%
5. 2%

8. Which one of the following would be an indirect quote from the perspective of a German investor?

1. £0.80=€1
2. $1.20=£1
3. £0.011=¥1
4. $1.00=€0.80

Answer 1

Part a)

cost of bottle in US - 2 dollars

in japan - 300 yen

Exchange rate = 1dollar = 135 yen

2 dollars = 270 yen

which means yen is overvalued by 10% ((300-270)/300)

Part b)

Exchange rate of dollar and euro - 1.2$ = 1 euro

dollar and yen - $0.0125 - 1 yen

Exchange rate between euro and yen = (1/1.2) *(0.0125/1) = 0.0104

1 euro = 0.0104 yen

Part c)

Inflation rate = (1+interest rate)/(1+ real rate of interest) - 1

= (1+1.5%)/(1+2%)- 1

= -0.05%

Part d)

Indirect quote for german investor would be-

$1.00=€0.80