536-2.2a_HW[1]

536-2.2a_HW[1] - 536-2.2a_HW, 11S Topic 2.2 International...

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536-2.2a_HW, 11S FIN 536 – SU Page 1 of 5 Topic 2.2 International Parity Conditions Exam Sample Problem 1 INTEREST RATE: SHOW ALL YOUR WORK CLEARLY An investor receives $1200 in one year in return for an investment of $1000 now. What is the nominal rate under the following scenarios? 1. Annual compounding. 2. Semiannual compounding. 3. Monthly compounding. Exam Sample Problem 1 – Solution Nominal Rate (I NOM ) Periodic Rate (I PER ) Effective Annual Rate (I EFF ) Annual compounding 20% 20% 20% Semiannual compounding 19.09% 9.54% 20% Monthly compounding 18.36% 1.53% 20% Exam Sample Problem 2 FE: SHOW ALL YOUR WORK CLEARLY Assume that the inflation rate is 3.5% and the interest rate is 4.7% in France. 1. Based on FE, what is the real interest rate in France? 2. Given that inflation rate is 0% in Japan. Based on FE, what is the nominal interest rate in Japan? (hint: what should be the real interest rate in Japan?) 3. Given that inflation rate is 1% in US. Based on FE, what is the nominal interest rate in US? (hint: what should be the real interest rate in US)? Exam Sample Problem 2 – Solution US France Japan One-year real interest rate 1.1594% 1.1594% 1.1594% One-year inflation rate 1% 3.5% 0% One-year interest rate 2.171% 4.7% 1.1594% Exam Sample Problem 3 IFE: SHOW ALL YOUR WORK CLEARLY Assume that the one-year interest rate is 7% in UK and 1.5% in US. The current exchange rate is 1.82 $/£. 1. What is the IFE exchange rate in one year? 2. Is £ expected to depreciate or appreciate against $? By how much percentage? 3. The inflation is 1% in the US. What is the real interest rate in US and UK? What is the inflation rate in UK? Exam Sample Problem 3 – Solution 1. 1.7264 $/£ 2. Depreciate, -5.1% 3. 0.5%; 0.5%; 6.47%
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536-2.2a_HW, 11S FIN 536 – SU Page 2 of 5 Exam Sample Problem 4 IRP: SHOW ALL YOUR WORK CLEARLY Assume that the one-year interest rate is 5% in UK and 1.5% in the US. The current exchange rate is 1.82 $/£. 1. What is the one-year forward exchange rate? 2. Is $ traded at forward premium or discount? What is the annualized forward premium or discount? 3. Is £ traded at forward premium or discount? What is the annualized forward premium or discount? Exam Sample Problem 4 – Solution
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This note was uploaded on 11/07/2011 for the course FIN 536 taught by Professor Staff during the Spring '11 term at S.F. State.

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536-2.2a_HW[1] - 536-2.2a_HW, 11S Topic 2.2 International...

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