FOREIGN EXCHANGE MARKET

EXERCISES

1. If a British car sells for GBP 20,000 and the GBP is worth AUD 2.75, the AUD price of the car is?

2. Calculate the exchange rate for EUR/JPY, given the two quotes: USD/EUR 0.978 and USD/JPY 119.20

3. Calculate the exchange rate for GBP/JPY, given the two quotes: USD/JPY 114.20 and GBP/USD 1.6750

4. Calculate the exchange rate for AUD/GBP, given the two quotes: AUD/USD 0.5640 and GBP/USD 1.5850

5. Given the following rates, what is the arbitrage profit may be made with respect to the Australian Dollar?
USD 1 = AUD 1.70
USD 1 = SGD 1.70
AUD 1 = SGD 0.96

6. A U.S. bank converted US$1 million to Swiss francs to make a Swiss franc loan to a valued corporate customer
when the exchange rate was 1.2 francs per dollar. The borrower agreed to repay the principal plus 5 percent
interest in one year. The borrower repaid Swiss francs at loan maturity and when the loan was repaid the
exchange rate was 1.3 francs per dollar. What was the bank's dollar rate of return?

7. A Swiss bank converted 1 million Swiss francs to euros to make a euro loan to a customer when the exchange
rate was 1.85 francs per euro. The borrower agreed to repay the principal plus 3.75 percent interest in one year.
The borrower repaid euros at loan maturity and when the loan was repaid the exchange rate was 1.98 francs per
euro. What was the bank's franc rate of return?

8. A Japanese investor can earn a 1 percent annual interest rate in Japan or about 3.5 percent per year in the
United States. If the spot exchange rate is 101 yen to the dollar, at what one-year forward rate would an
investor be indifferent between the U.S. and Japanese investments?

9. A European investor can earn a 4.75 percent annual interest rate in Europe or 2.75 percent per year in the
United States. If the spot exchange rate is $1.58 per euro, at what one-year forward rate would an investor be
indifferent between the U.S. and Japanese investments?

10. An investor starts with $1 million and converts it to 0.75 million pounds, which is then invested for one year. In a
year the investor has 0.7795 million pounds, which she then converts to dollars at an exchange rate of 0.72
pounds per dollar. The U.S. dollar annual rate of return earned was ________.

11. An investor starts with €1 million and converts it to £694,500, which is then invested for one year. In a year the
investor has £736,170, which she then converts back to euros at an exchange rate of 0.68 pounds per euro. The
annual euro rate of return earned was ________.

12. 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.

13. The spot rate for the Argentine peso is $0.3600 per peso. Over the year, inflation in Argentina is 10 percent and
U.S. inflation is 4 percent. If purchasing power parity holds, at year-end the exchange rate should be
approximately ________ dollars per peso.
14. You can buy or sell the £ spot at $1.98 to the pound. You can buy or sell the pound one-year forward at $2.01 to
the pound. If U.S. annual interest rates are 5 percent, what must be the approximate one-year British interest
rate if interest rate parity holds?

15. You can buy or sell the yen spot at ¥102 to the dollar. You can buy or sell the yen one-year forward at ¥104 to
the dollar. If U.S. annual interest rates are 4 percent, what must be the approximate one-year Japanese interest
rate if interest rate parity holds?