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5362.2a_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
Oneyear real interest rate
1.1594%
1.1594%
1.1594%
Oneyear inflation rate
1%
3.5%
0%
Oneyear interest rate
2.171%
4.7%
1.1594%
Exam Sample Problem 3
IFE: SHOW ALL YOUR WORK CLEARLY
Assume that the oneyear 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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FIN 536 – SU
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Exam Sample Problem 4
IRP: SHOW ALL YOUR WORK CLEARLY
Assume that the oneyear interest rate is 5% in UK and 1.5% in the US.
The current exchange rate is 1.82 $/£.
1.
What is the oneyear 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.
 Spring '11
 Staff
 Interest, Interest Rate, International Finance

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