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17 Sep 2018

Suppose the spot exchange rate for the Hungarian forint is HUF 221.53. The current one-year U.S. interest rate is 4.9 percent and the current Hungarian one-year interest rate is 8.6 percent. a. What is the one-year forward rate? b. If the two year U.S. and Hungarian interest rates are the same, what is the two-year forward rate?

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Nelly Stracke
Nelly StrackeLv2
18 Sep 2018

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Suppose that the one-year U.S. interest rate is 4% and the one-year U.K. interest rate is 6%. If the current spot rate is $1.80 per pound, what must the one-year forward rate ($/pound) be according to the approximate covered interest parity?

a. 1.360

b. 1.764

c. 1.836

d. 1.980

And why?

Suppose you observe the following spot and forward exchange rates between the US Dollar and the Canadian Dollar:

Spot Exchange Rate One-Year Forward Exchange Rate

Canadian dollar (US Dollar/Canadian Dollar) 0.8932 0.9133

1. The current one-year interest rate on US Treasury securities is 6.89%. if interest rate parity holds, what is the expected yield on one-year Canadian securities of equal risk? A, 3.63% B. 4.54% C. 4.77% D. 3.86%

2. Which of the following statements is implied by interest rate parity theory?

A. A product bought in one country should have the same price in other countries, adjusted for exchange rate.

B. An investment in one's home country should have the same return as a similar investment in a doreign country.

C. If two countries have the same inflation rate, they should have the same interest rate too.

D. Interest rates in all countries with the same political risk should be the same.

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%.

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