Question

The current USD/JPY spot exchange rate is 110 (USD is base currency). Assume that your bank quotes you a 180-day forward rate of 108. Which of the following statements is correct about the JPY.

Select one:

A. The JPY is selling at an annualized forward discount of 3.64%.

B. The JPY is selling at an annualized forward premium of 1.85%.

C. The JPY is selling at an annualized forward premium of 3.70%.

D. The JPY is selling at an annualized forward premium of 3.64%.

E. The JPY is selling at an annualized forward discount of 1.82%.

A British retailer placed a purchase order for Indonesian-made medical masks that are in high demand during the current Covid-19 pandemic. The total amount due for this purchase in Indonesian Rupiah (IDR) is 25 billion (IDR 25,000,000,000). What is the equivalent amount due in GBP if the spot exchange rate (bid-ask) is GBP/IDR 20,098-20,319? (GBP is base currency, and yes the rate is in thousands of rupiah).

Select one:

A. GBP 1,243,904.87

B. GBP 507,975,000 million

C. GBP 1,230,375.51

D. GBP 502,450,000 million

You just joined a US multinational company that is currently considering to make a long term investment in Canada. Your boss asked you to determine whether the current exchange rate of CAD 1.45 per 1 USD is too high or too low compared to its long-term equilibrium value. After some confusion about where to start, you remembered the PPP theory from your MGB 512 class in Victoria. Using CPI data on Canada and the US, you calculate that the PPP-implied exchange rate is 1.36 Canadian per 1 US dollar.  

Thus, at current market exchange rates the CAD appears to be ________ by ________.

Select one:

A. overvalued; 6.2%

B. undervalued; 6.6%

C. overvalued; 6.6%

D. undervalued; 6.2%

Answer 1

1]

JPY/USD exchange rate = 1 / (USD/JPY exchange rate)

JPY/USD spot exchange rate = 1 / 110 = $0.009091 / JPY

JPY/USD forward exchange rate = 1 / 108 = $0.009259 / JPY

As each JPY can buy a higher quantity of USD in the forward market, the JPY is trading at a premium.

Annualized forward premium = ((forward rate - spot rate) / spot rate) * (360 / days to maturity)

Annualized forward premium = (($0.009259 - $0.009091) / $0.009091) * (360 / 180)

Annualized forward premium = 3.70%

2]

Equivalent amount due in GBP = amount due in IDR / spot exchange rate

The spot exchange rate to use is the bid rate because that is the amount of IDR that 1 GBP can buy

Equivalent amount due in GBP = 25,000,000,000 / 20,098

Equivalent amount due in GBP = GBP 1,243,904.87