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[ga5]:
Profit =
[$1750(Y107.20/$1)(0.0074/Y1)($1/0.7622)]-$1750
Profit = $71.36
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[ga6]:
$9,500* Can$1.0965= Can$10416.75
Can$10416.75*Â£.6726=Â£7006.30605
Â£7006.30605/Â£.7277=$9628.01436
$9628.01436-$9,500=$128.01
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[ga7]:
OR
[$9,500(Can$1.0965/$1)(($1/Â£.7277)(Â£.6726/Can$1)] âˆ’
$9,500
=

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[ga8]:
SF315/$341 = SF0.9238/$

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[ga9]:
Price = $800 * (1/1.3531)
Price = 591.23 Â£.

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[ga10]:
Forward rate = 0.7577[1+(0.0219-0.0267)]
Forward rate = 0.7541

2.43 percent. Assuming relative purchasing power parity holds, what will the exchange rate be in
two years?
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[ga11]:
Forward rate = 1.0957[1+(0.0243-
0.0298)]^2

MC algo 31-18 Covered Interest Arbitrage
The spot rate between Canada and the U.S. is Can$1.2431/$, while the one-year forward rate is
Can$1.2430/$. The risk-free rate in Canada is 4.53 percent and risk-free rate in the U.S. is 2.71
percent. How much in profit can you earn on $9500 utilizing covered interest arbitrage?
Forward rate = 1.0837
a)
$193.61
b)
$138.96
c)
$173.70
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[ga12]:
Profit = [$9500

MC algo 31-20 interest rate parity
The one- year forward rate for the swiss franc is SF1.1377/$. The spot rate is SF1.1506/$.The
interest rate on risk-free asset in Switzerland is 2.39% percent. If interest rate parity exists, what
is the one-year risk-free rate in the U.S.?
*
(Can$1.2430/$)
*(1.0453)(1$/
Can$1.2430
)]-
[9500*(1.0271)]
Profit = $173.70
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[ga13]:
R
US = [1+2.39%
/
(1.1377/1.1506)] -1
R
US = 0.0355 or 3.55%

MC Qu. 89 The current spot rate is C$1.400 and the one-year forward ...
The current spot rate is C$1.418 and the one-year forward rate is C$1.364. The nominal risk-free
rate in Canada is 4 percent while it is 8 percent in the U.S. Using covered interest arbitrage you
can earn an extra _____ profit over that which you would earn if you invested $1 in the U.S.

MC Qu. 90 The spot rate for the Japanese yen currently is y106 per $...
The spot rate for the Japanese yen currently is Â¥109 per $1. The one-year forward rate is Â¥107
per $1. A risk-free asset in Japan is currently earning 4 percent. If interest rate parity holds,
approximately what rate can you earn on a one-year risk-free U.S. security?

d)
6.02 percent
e)
5.94 percent
MC algo 31-16 Relative Purchasing Power Parity
The current spot rate between the euro and dollar is â‚¬1.1005/$. The annual inflation rate in the
U.S is expected to be 2.09 percent and the annual inflation rate in euroland is expected to be 2.75
percent. Assuming relative purchasing power parity holds, what will the exchange rate be in two
years?
a)
â‚¬1.0932/$
b)
â‚¬1.1224/$
c)
â‚¬1.0860/$
d)
â‚¬1.1151/$
e)
â‚¬1.1078/$

Problem 18-2 Using the Cross-Rate [LO 1]