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sample_quiz_2_solutions[1] - Version Fin 536 Sample Quiz 2...

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Version Fin 536 Sample Quiz 2 Solutions Name_________Section_4pm/7pm 1. Fill out the answers. a. Citibank quotes ¥98.40-100.30/\$. Then the bid price of yen is __¥100.30/\$___ _____ and the bid price of dollar is _____¥98.40/\$_ ________. b. Three banks are quoting the following rates: Citibank quotes \$1.52/£; UBS quotes €1.30/£; Deutsche Bank quotes \$1.45/€. If you start with \$1000, you profit will be \$____240.13____ ___ from arbitrage. The direction of arbitrage includes _____buying__ _____ __ (buying/selling) € from/to UBS. c. The exchange rate between yen and U.S. dollar was ¥100/\$ in Jan 2009 and ¥90/\$ in August 2009, then U.S. dollar _ depreciated __ (appreciated/depreciated) by %__11.1_ ______ d. A Big Mac costs €2.8 in Europe , while it costs \$3.5 in the U.S. The implied PPP exchange rate between euro and dollar is \$__1.25_ ______ /€ . If the actual ma rket exchange rate is S(\$/€)=1.1 5, then the real effective exchange rate is ___0.92__ _____ and euro is ___under-valued_ ___(over- valued/under-valued) compared to the PPP rate. 2. (Covered Interest Arbitrage) You are facing the following exchange rates and interest rates. You can borrow 1,000,000 or equivalent amount of \$. Show how you can profit from the covered interest arbitrage?

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