Question

The current spot rate between the euro and dollar is €1.0957/$. The annual inflation rate in the U.S is expected to be 2.98 percent and the annual inflation rate in euroland is expected to be 2.43 percent. Assuming relative purchasing power parity holds, what will the exchange rate be in two years?

Answer #1

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Given a current spot rate of 8.46 Swedish krona per U.S. dollar,
expected inflation rates of 4% per annum in the U.S. and 5% in
Sweden, use the formula for relative purchasing power parity to
estimate the one-year (forward) spot rate of krona per dollar.

24.
Assume the spot exchange rate is £.6229. The expected inflation
rate in the U.K. is 3.8 percent and in the U.S. it is 2.9 percent.
What is the expected exchange rate three years from now if relative
purchasing power parity exists?
£.5391
£.6062
£.6399
£.6285
£.6233

Today’s spot rate of the euro is USD1.1676/EUR. Assume the
relative PPP holds, the
U.S. inflation over one year is expected to 3 percent, while the
EU inflation is expected to
be 2 percent. If you plan to go on vacation in Paris, France and
will need 5000 euros in
one year. What is the expected exchange rate of euro? What is
the expected amount of
dollars you need to pay for your trip in one year?

The spot rate of exchange between the U.S. dollar and the euro
is 1.35 (dollar/euro) and the three-month forward rate of exchange
is 1.29.
Select one:
a. The euro is selling at a discount and the standard forward
discount is 17.78 percent.
b. The euro is selling at a premium and the standard forward
premium is 18.60 percent.
c. The euro is selling at a premium and the standard forward
premium is 15.78 percent.
d. The euro is selling at...

Assume the spot exchange rate is 106.90 Japanese yen per U.S.
dollar. If the inflation rate in the U.S. is expected to be 2% and
the inflation rate in Japan is 1% for the next two years, then
the:
exchange rate will increase.
exchange rate will double.
dollar will appreciate relative to the yen.
dollar will become more valuable.
Yen will strengthen against the dollar.

If the spot exchange rate is 0.62 euro per Canadian dollar and
the three-month forward rate is 0.60 euro per
Canadian dollar, then the ________ on the Canadian dollar in
percentage (at an annual rate) is roughly
________.
Select one:
a. forward premium, 3.226%
b. forward premium, 12.90%
c. forward discount, 12.90%
d. forward discount, 3.226%
The 1-year interest rates on Canadian dollar and U.K. pound are
2 % and 5 % respectively. If the current spot rate is 2...

Suppose that the expected dollar/euro exchange rate is $1.10 per
euro. If the dollar interest rate is 7 percent and the euro
interest rate is 2 percent, and the current dollar/euro exchange
rate is $0.99 per euro, does the interest parity hold?
Select one:
a. Yes.
b. No.

At the beginning of the year the exchange rate between the
Brazilian real and the U.S. dollar was 2.2 reals per dollar. Over
the year, Brazilian inflation was 12 percent and U.S. inflation was
4 percent. If purchasing power parity holds, at year-end the
exchange rate should be approximately ________________
dollars per real.
2.3913
0.4895
2.8498
0.4182
0.3440

The spot rate in the $/euro is .7 $/euro. What will the expected
spot rate be, if the interest rates in the s and the euro are .04
and .09 respectively? Show both dollar and euro terms. Explain the
meaning of your results. Does the aforementioned relate to
inflation differences between the two currencies?

6. Assume that the current dollar-Euro exchange rate
(E$/€) is equal to 1.05, the real exchange rate
(qus/Eur) = 1.26, the price level equals 1 in the U.S.
and 1.2 in Europe. Assume that relative PPP holds.
a. If inflation is 4% in the U.S. but 1% in Europe, what will be
the price levels in the U.S. and Europe a year from now?
b. Given your answer to part a, what will be the nominal
exchange rate (E$/€) a...

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