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22 Aug 2019

What will be effect of Brexit on the exchange rate between the British pound and the euro? Between the euro and the US dollar? Between the U.S dollar and the British pound? On what evidence do you base your opinion? Consider any unbiased predictors or other factors which can be used objectively to support your position.

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Jarrod Robel
Jarrod RobelLv2
24 Aug 2019

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a. On September 24, 20xx, you purchased a 3-month British-pound denominated CD by converting $1 million to pounds at a rate of .4964 pounds for U.S. dollars. It is now three months later, i.e. December 24, 20xx, and the exchange rate between U.S. dollars and British pound is .4998 pounds per U.S. dollar. (i) Has the U.S. dollar appreciated or depreciated against the British pound? b. Using the information in part (a), what is you gain or loss on the investment in the CD? Assume that you will be paid interest on the CD, and the CD interest rate is 4 percent annually.

Where can you find currency exchange rates and cross rates? At OANDA.com, the currency website. At this site's main page, click on the Currency Converter tab found at the top of the page and then below that, choose "Converter" to convert one currency into another.

Question 1: Several years ago the Wall Street Journal reported that the “indirect” exchange rate between the Canadian and US dollars was $0.9507 CAN per $1.00 US (or $0.9507 Canadian dollars per one US dollar). Using the OANDA website, identify the current “indirect” exchange rate between these two currencies in terms of $CAN per one $US?

Question 2: Has the U.S. dollar appreciated or depreciated relative to the Canadian dollar over this two-year time period? Explain your answer.

Question 3: Suppose the exchange rate between the U.S. dollar and the Swedish krona is 6.55 kronas per one U.S. dollar and the exchange rate between the British pound and the dollar is 0.641 pounds per U.S. dollar. Determine the cross rate between kronas and pounds. Your answer should be expressed as Swedish kronas per one British pound.

(B) Calculate the premium or discount of the British pound in the forward market where the spot rate is $1.982 US per one pound and the 90 day forward rate is $1.967 US per one pound. Be sure that you calculate the percent amount of the premium or discount AND also identify the amount as either a premium or discount.

(C) The spot rate of the Brazilian Real (BRL) is $0.44 US. The one-year U.S. interest rate is 5.75% and the one-year Brazilian interest rate is 9.52%.

Question 1: Assuming the existence of interest rate parity, determine the forward premium or discount of the Brazilian Real (be sure to identify whether it is a premium or a discount).

Question 2: Given the forward discount for the Real in question 1, now estimate the forward exchange rate of the Brazilian Real.

Question 3: Given interest rate parity, assume that the forward rate of the Brazilian Real is the same as the spot rate, one BRL = $0.44 US. Explain how U.S. investors could use covered interest arbitrage to lock in a higher yield than 5.75%.

The most widely used currency in the Eurobond market is the euro. True or False?

As inflation in France increases and stays the same in the U.S., the exchange rate of the euro to the dollar will increase. True or False?

The Swiss franc is selling for $.9412 and the British pound is selling for $1.5119. The cross rate between the franc and the pound (the number of Swiss francs that would buy one British pound) is approximately:

.161

1.61

.0322

3.22

Which of the following hedging strategies is not used to minimize transaction exposure?

The Eurobond market

The forward exchange market

The money market

Which of the following is NOT an example of a factor that can significantly influence exchange rates?

The cost to purchase a loaf of bread in the U.S. has increased by $.50 while the cost has remained the same in London.

The cost of capital has increased by 2% in the U.S. and has decreased by 2% in Germany.

Interest rates on short-term investments in the U.S. have decreased to 4% while interest rates in Japan are at 8%.

The U.S. has begun to export a higher level of goods to China than the prior year.

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