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Sample Quiz 3 Solution

# Sample Quiz 3 Solution - Version Fin 536 Sample Quiz 3...

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Version Fin 536 Sample Quiz 3 Solutions Name____________Section_4pm/7pm Note: You must review all potential topics for the quiz. This sample quiz does not cover all testable topics. 1. Fill out the answers. a. (PPP forecast)Assume that the inflations rates in Japan and in the U.S. are forecasted to be 1% and 3% respectively, if the current spot rate is ¥90/\$, then the forecast of the exchange rate is ¥___88.25_ __\$ in a year. b. (Forecast by the UIRP) The interest rate is 1% in the U.S. and 7% in Australia. Based on the UIRP, we expect the Australian dollar to __depreciate______ (depreciate/appreciate) by __5.6__ % in the next year. c. In Jan 2006, the Argentine peso was trading at Peso3.00/\$ and the inflation rate was expected to be 12% per year. At the same time the U.S. was expected to have 3% inflation rate. If PPP held, we would expect the exchange rate to be Peso___3.26__ _______\$ in Jan 2007. In fact, the Argentine peso rate was Peso2.8/\$ in Jan 2007. We conclude that the peso was__over-valued__ _ (over- valued/under-valued) according to the PPP exchange rate in Jan 2007.

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