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73) Assume $1 is currently equal to £.7741 in the spot market. Assume the expected inflation
rate in the U.S. is 2.6 percent while it is 2.3 percent in the U.K. What is the expected exchange
rate one year from now if relative purchasing power parity exists?
A) £.7764
B) £.7878
C) £.7839
D) £.7718
E) £.7791
74) Assume $1 is currently equal to £.7658. Also assume the expected inflation rate in the U.K.
is 3.6 percent while it is 3.3 percent in the U.S. What is the expected exchange rate four years
from now if relative purchasing power parity exists?
A) £.7750
B) £.7635
C) £.7681
D) £.7623
E) £.7567
75) Suppose the spot and three-month forward rates for the yen are ¥102.32 and ¥102.27,
respectively. What is the approximate annual percent difference between the inflation rate in
Japan and in the U.S.?
A) 1.93 percent
B) −1.21 percent
C) 1.67 percent
D) −.20 percent
E) 2.28 percent
76) Assume the spot exchange rate for the Hungarian forint is 267.767 HUF. Also assume the
inflation rate in the United States is 1.6 percent per year while it is 3.5 percent in Hungary. What
is the expected exchange rate three years from now?
A) 252.792 HUF
B) 272.855 HUF
C) 283.322 HUF
D) 262.679 HUF
E) 259.406 HUF
77) Assume the current spot rate is C$1.2568 and the one-year forward rate is C$1.2455. Also
assume the nominal risk-free rate in Canada is 3.7 percent compared to 4.1 percent in the U.S.
Using covered interest arbitrage, how much additional profit can you earn over that which you
would earn if you invested $1 in the U.S for one year?
A) $.0054
B) $.0042
C) $.0008
D) $.0015
E) $.0061
78) Assume the current spot rate is C$1.0875 and the one-year forward rate is C$1.0724. Also
assume the nominal risk-free rate in Canada is 3.9 percent while it is 4.1 percent in the U.S. How
much additional income can you earn by using covered interest arbitrage as compared to
investing $1 in the U.S for one year?
A) $.0118
B) $.0126
C) $.0020
D) $.0110
E) $.0087
79) Assume the spot rate for the Japanese yen currently is ¥102.32 per $1 and the one-year
forward rate is ¥102.69 per $1. A risk-free asset in Japan is currently earning 2.5 percent. If
interest rate parity holds, approximately what rate can you earn on a one-year risk-free U.S.
security?
A) 1.63 percent
B) 2.01 percent
C) 2.14 percent
D) 2.96 percent
E) 1.01 percent
80) Assume the spot rate for the British pound currently is £.6369 per $1. Also assume the one-
year forward rate is £.6421 per $1. A risk-free asset in the U.S. is currently earning 3.2 percent.
If interest rate parity holds, what rate can you earn on a one-year risk-free British security?
A) 4.18 percent
B) 4.57 percent
C) 3.67 percent
D) 4.04 percent
E) 4.92 percent
81) Assume a risk-free asset in the U.S. is currently yielding 4.1 percent, a Canadian risk-free
asset is yielding 3.7 percent, and the current spot rate is C$1.2633. What is the approximate
three-year forward rate if interest rate parity holds?
A) C$1.2482
B) C$1.2684
C) C$1.2541
D) C$1.2785
E) C$1.2582
82) Assume the spot rate on the Canadian dollar is C$1.2648, the risk-free nominal rate in the
U.S. is 3.3 percent, and the risk-free nominal rate in Canada is 3.8 percent. What one-year
forward rate will create interest rate parity?
A) C$1.2362
B) C$1.2429
C) C$1.2709
D) C$1.2587
E) C$1.2515
83) Assume the spot rate on the pound is £.5920 and the 6-month forward rate is £.5929. Also
assume interest rate parity holds and the current six-month risk-free rate in the United States is
3.1 percent. What must the six-month risk-free rate be in Great Britain?
A) 3.25 percent
B) 2.87 percent
C) 2.94 percent
D) 3.10 percent
E) 3.52 percent
84) Assume the spot rate on the Canadian dollar is C$1.0926, the risk-free nominal rate in the
U.S. is 3.8 percent and 4.1 percent in Canada. Which one of the following four-year forward
rates best establishes the approximate interest rate parity condition?
A) C$1.1058
B) C$1.1012
C) C$1.0959
D) C$1.0893
E) C$1.0795
85) You are considering a project in South Africa which has an initial cost of R385,000. The
project is expected to return a one-time payment of R428,900 four years from now. The risk-free
rate of return is 3.5 percent in the U.S. and 2.4 percent in South Africa. The inflation rate is 4
percent in the U.S. and 3 percent in South Africa. Currently, you can buy R10.48 for $1. How
much will the payment of R428,900 be worth in U.S. dollars four years from now?
A) $42,777
B) $40,560
C) $47,251
D) $46,926
E) $44,357
86) You are expecting a payment of NKr450,000 three years from now. The risk-free rate of
return is 3 percent in the U.S. and 4 percent in Norway. The inflation rate is 2.5 percent in the
U.S. and 3 percent in Norway. Currently, you can buy NKr5.94 for $1. How much will the
payment three years from now be worth in U.S. dollars?
A) $75,758
B) $73,530
C) $81,511
D) $78,077
E) $69,888
87) You are expecting a payment of C$100,000 two years from now. The risk-free rate of return
is 3.8 percent in the U.S. and 4.1 percent in Canada. The inflation rate is 2 percent in the U.S.
and 3 percent in Canada. Suppose the current exchange rate is C$1 = $.9132. How much will the
payment two years from now be worth in U.S. dollars?
A) $91,870
B) $102,414
C) $108,851
D) $88,202
E) $90,775
88) Suppose the current spot rate for the Norwegian krone is NKr5.9433 while the expected
inflation rate in Norway is 3.1 percent and 1.7 percent in the U.S. A risk-free asset in the U.S. is
yielding 3.2 percent. What risk-free rate of return should you expect on a Norwegian security?
A) 5.1 percent
B) 4.0 percent
C) 4.4 percent
D) 5.9 percent
E) 4.6 percent
89) Suppose the current spot rate for the Norwegian krone is NKr5.5923 while the expected
inflation rate in Norway is 2.2 percent compared to 1.8 percent in the U.S. A risk-free asset in the
U.S. is yielding 3.4 percent. What approximate real rate of return should you expect on a risk-
free Norwegian security?
A) 1.2 percent
B) 1.6 percent
C) 2.0 percent
D) .4 percent
E) .6 percent
90) Assume the expected inflation rate in Finland is 3.3 percent compared to 2.4 percent in the
U.S. A risk-free asset in the U.S. is yielding 4.3 percent. What approximate real rate of return
should you expect on a risk-free Finnish security?
A) .9 percent
B) 1.9 percent
C) 2.1 percent
D) 2.5 percent
E) 3.4 percent
91) Suppose the spot and six-month forward rates on the Norwegian krone are NKr5.94 and
NKr6.05 respectively. The annual risk-free rate in the United States is 4.5 percent, and the
annual risk-free rate in Norway is 7 percent. What would the six-month forward rate have to be
on the Norwegian krone to prevent arbitrage?
A) NKr6.0138
B) NKr6.0072
C) NKr6.0103
D) NKr6.0174
E) NKr6.0067
92) You observe that the inflation rate in the United States is .78 percent per year and that T-bills
currently yield 2.94 percent annually. Using the approximate international Fisher effect, what do
you estimate the inflation rate to be in Australia, if short-term Australian government securities
yield 3.53 percent per year?
A) 4.22 percent
B) 1.37 percent
C) 2.24 percent
D) 1.87 percent
E) .88 percent
93) You want to invest in a project in Canada that has an initial cost of C$812,000 and is
expected to produce cash inflows of C$340,000 a year for three years. The project will be
worthless after the three years. The expected inflation rate in Canada is 4 percent while it is only
3 percent in the U.S. The applicable interest rate for the project in Canada is 12 percent. Assume
the current spot rate is C$1 = $.7874. What is the net present value of this project in Canadian
dollars?
A) −C$1,889
B) −C$2,924
C) C$4,623
D) C$6,139
E) C$7,528
94) You want to invest in a riskless project in Sweden. The project has an initial cost of SKr3.86
million and is expected to produce cash inflows of SKr1.76 million a year for three years. The
project will be worthless after three years. The expected inflation rate in Sweden is 3.2 percent
while it is 2.8 percent in the U.S. A risk-free security is paying 4.1 percent in the U.S. The
current spot rate is SKr7.7274. What is the net present value of this project in Swedish krona if
the international Fisher effect applies?
A) SKr1,087,561
B) SKr701,458
C) SKr823,333
D) SKr958,029
E) SKr978,177
95) You are analyzing a project with an initial cost of £50,000. The project is expected to return
£12,000 the first year, £36,000 the second year, and £40,000 the third and final year. There is no
salvage value. Assume the current spot rate is £.6346. The nominal return relevant to the project
is 12 percent in the U.S. The nominal risk-free rate in the U.S. is 3.4 percent while it is 4.1
percent in the U.K. Assume that uncovered interest rate parity exists. What is the net present
value of this project in U.S. dollars?
A) $23,611
B) $26,509
C) $26,930
D) $29,639
E) $30,796
96) You are analyzing a project with an initial cost of £130,000. The project is expected to return
£20,000 the first year, £50,000 the second year, and £90,000 the third and final year. There is no
salvage value. The current spot rate is £.6211. The nominal risk-free return is 5.5 percent in the
U.K. and 6 percent in the U.S. The return relevant to the project is 14 percent in the U.S. Assume
that uncovered interest rate parity exists. What is the net present value of this project in U.S.
dollars?
A) −$19,062
B) −$5,409
C) $5,505
D) $9,730
E) $18,947
97) Global Inc. just placed an order for 25,000 units at a cost of 162 Singapore dollars each,
which will be payable when the shipment arrives in 120 days. Global sells these units at $148
each. The spot exchange rate is S$1.2537. What will the profit be on this order if the exchange
rate increases to S$1.2602 over the next 120 days?
A) $513,564
B) $508,121
C) $516,407
D) $486,224
E) $472,433
98) International Markets can purchase an item for ¥27,500. What will be the dollar change in
the cost of that item in U.S. dollars if the exchange rate of ¥111.30 changes to ¥113.25?
A) $3.74
B) $4.25
C) −$3.74
D) −$4.25
E) −$4.72
