Question

(1) if five year interest rates on USD and CDN are 6% and 5% respectively, and the current spot rate for CDN is $0.90/USD. what is the imlied five year CDN spot rate?

(2) Suppose that the Brazilian real devalues by 40% against the USD. By how much will the dollar appreciate against the real?

(3) What is the 90 day forward rate if US interest is 9%, Japanese interest is 7%, and the Spot rate is $0.003700/ Yen? ( assume there are no arbitrage and 360 day and interest rate parity)

(4) what is the annualized premium on the 90 day forward rate if the spot rate is $0.003800/Yen and the forward rate is $0.003828/ Yen ?

(5) Suppose annual inflation rate in the US and Mexico are expected to be 6% and 80% respectively, over the next several years. If the current spot rate for Mexico peso is $0.005. what is the best estimate of the peso's spot value in 3 years?

(9) if the expected inflation rate is 5% and the real required return is 6% , then the fisher effect says that the nominal interest rate should be.....

(10) During the 1992 currency crisis, the bank of england borrowed DM 33 billion from the Bundesbank when a pound was worth DM 2.78 or $1.912. It sold these DM in the foreign exchange market for pounds and repaid these DM at the post- crisis rate of DM 2.50:pound 1. By then, the dollar: pound exchange rate was $1.782: pound 1. During that time, by what percentage had the pound sterling appreciated/ depreciated against the dollar?

Answer 1

(1) USD Annualized Rate = 6% and CDN Annualized Rate = 5%,Current Spot Rate = $ 0.9 / CDN

Tenure = 5 years

Therefore, Implied 5-year forward rate = 0.9 x [(1.06)^(5) / (1.05)^(5)] = $ 0.9437/CDN

(2) Let the initial Real/USD rate be 1.4 Real / $

When the Brazilian Real devalues 40% against the USD it implies that a fixed amount of Real can purchase 40% less USD now (post devaluation) as compared to earlier.

Therefore, New Real/USD Rate: 1.4 Real / 0.6 $ or 2.33 Real/$

Now, $1 initially purchased 1.4 reals and purchases 2.33 real post real devaluation.

Therefore, $ appreciation against real = [(2.33-1.4) / 1.4] x 100 = 66.67 %

(3) Current Exchange Rate = $ 0.0037/Yen, USD Interest Rate = 9% and Japanese Interest Rate = 7 % and Tenure = 90 days, 1 Year = 360 days

Therefore, 90-day USD forward Rate = 0.0037 x [1+(0.09) x (90/360)] / [1+(0.07) x (90/360)] = $ 0.003718/ Yen

(4) Initial Exchange Rate = $ 0.0038/yen and Forward Rate = $ 0.003828/Yen

Tenure = 90 Days

Annualized Premium = [(0.003828-0.0038) / 0.0038] x (360/90) x 100 = 2.9474 %

NOTE: Please raise separate queries for solutions to the remaining unrelated questions, as one query is restricted to the solution of only one complete question with up to four sub-parts or at most 4 closely related questions.