Ch_21_Inclass_Exercises_Solutions

# Ch_21_Inclass_Exercises_Solutions - Ch 21 Inclass Exercises...

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1 Ch 21 Inclass Exercises Solutions Problems 1. If it takes 1.45 Krone to purchase 1 US dollar, how many dollars buys one Krone? =1/1.45 = US 0.6896 2. Suppose you visit Japan and spend 150,000 in yen at 110.55 Yen per dollar. Then you visit Thailand and spend 32,000 in Baht at 34.11 Baht per dollar. How much did you spend in US Dollars? 10,000/110.55 + 3,200/34.11 =US 2,294.99 3. If the exchange rate goes from 110.55 yen per US dollar to 112.62 yen per US dollars, by what percentage has the yen appreciated or depreciated relative to the US dollar? 110.55/112.62 – 1 = -1.84% 4. Assume that one U.S. dollar buys 115 Japanese Yen, and one U.S. dollar buys .54 Pound Sterling. What is the cross- rate stated as yen per pound? 115/.54 = 212.96 Yen per Pound Cross Rates Using US \$ to compute Currency 1 Abbreviation Yen Currency 2 Abbreviation Pound C1 per US \$ 115.0000 C2 per US \$ 0.5400 Cross Rate Yen/Pound 212.9630 5. We observe the following quotes 115 Yen per \$1 2.2 Swiss Franc per \$1 55 Yen per 1 Swiss Franc If you have US \$1,000 to invest, how much can you make from triangle arbitrage?

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2 Triangle Arbitrage Home Currency US Foreign Currency 1 Yen Foreign Currency 2 SF Amount to invest HC US 1,000.0000 FC1 per HC Yen per US 115.0000 FC2 per HC SF per US 2.2000 Actual Quote Yen/SF Quote 55.0000 Cross Rate Yen/SF via cross rate 52.2727 Arbitrage Buy low Yen/SF via cross rate 52.2727 Sell high Yen/SF Quote 55.0000 Opportunity 1 Buy 0 0.0000 0.0000 Buy 0 0.0000 #DIV/0! Buy US 0.4545 #DIV/0! Profit #DIV/0! Opportunity 2 Buy buy SF 2.2000 2,200.0000 Buy buy Yen 0.0182 121,000.0000 Buy US 0.0087 1,052.1739 Profit 52.1739 Suppose the UK spot exchange rate is .85 UK pound per U.S. dollar. U.S. inflation is expected to be 3% per year, and UK inflation is expected to be 6%. 6. Do you expect the U.S. dollar to appreciate or depreciate relative to the Canadian dollar? Since expected inflation is lower in the U.S., we would expect the U.S. dollar to appreciate relative to the K pound. 7. What is the expected exchange rate in one year using approximate relative PP?
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## This note was uploaded on 11/29/2011 for the course FINANCE 332 taught by Professor Linney during the Fall '11 term at Guilford Tech.

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Ch_21_Inclass_Exercises_Solutions - Ch 21 Inclass Exercises...

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