PS08 - EC 340 Spring 2011 Problem Set 8 1 There are three...

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Unformatted text preview: EC 340 Spring 2011 Problem Set 8 1. There are three currencies: U.S. dollars ($), British pounds (£), and European euros (€). The three exchange rates are: $2 = £1, $0.75 = €1, and €3 = £1 Show how an arbitrageur who begins with dollars can make a profit in this situation. 2. There are three currencies: U.S. dollars ($), British pounds (£), and European euros (€). The three exchange rates are: $2 = £1, $0.75 = €1, and €3 = £1 Show how an arbitrageur who begins with pounds can make a profit in this situation. 3. There are three currencies: U.S. dollars ($), British pounds (£), and European euros (€). The three exchange rates are: $2 = £1, $0.75 = €1, and €3 = £1 Show how an arbitrageur who begins with euros can make a profit in this situation. 4. Suppose that the spot rate for the euro is $0.90 and the forward rate $1.40 and the forward rate is $1.47. Is the euro selling forward at a discount or at a premium? Calculate the size of the discount or premium. 5. Suppose that the U.S. interest rate is 4 percent and the Canadian interest rate is 5 percent. What is the implied forward premium or discount on the Canadian dollar? 6. Suppose that the U.S. interest rate is 3 percent and the German interest rate is 1 percent. What is the expected rate of appreciation or depreciation of the euro based on uncovered interest parity? ...
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