西方经济学英文讲义13

Chapter 13: Exchange Rates and the Foreign Exchange Market: An Asset Approach Multiple Choice Questions 1. How many dollars would it cost to buy an Edinburgh Woolen Mill sweater costing 50 British pounds if the exchange rate is 1.25 dollars per one British pound? A. 50 dollars B. 60 dollars C. 70 dollars D. 62.5 dollars E. 40 British pounds Answer: D 2. How many dollars would it cost to buy an Edinburgh Woolen Mill sweater costing 50 British pounds if the exchange rate is 1.50 dollars per one British pound? A. 50 dollars B. 60 dollars C. 70 dollars D. 80 dollars E. 75 dollars Answer: E 3. How many dollars would it cost to buy an Edinburgh Woolen Mill sweater costing 50 British pounds if the exchange rate is 1.80 dollars per one British pound? A. 40 dollars B. 90 dollars C. 50 dollars D. 100 dollars E. 95 dollars Answer: B 4. The German currency is called the A. Euro B. DM C. Yen D. Dollar E. Pound Answer: A 5. How many British pounds would it cost to buy a pair of American designer jeans costing $45 if the exchange rate is 1.50 dollars per British pound? A. 10 British pounds B. 20 British pounds C. 30 British pounds D. 35 British pounds E. 25 British pounds Answer: C 6. How many British pounds would it cost to buy a pair of American designer jeans costing $45 if the exchange rate is 1.80 dollars per British pound? A. 10 British pounds B. 25 British pounds C. 20 British pounds D. 30 British pounds E. 40 British pounds Answer: B 7. How many British pounds would it cost to buy a pair of American designer jeans costing $45 if the exchange rate is 2.00 dollars per British pound? A. 22.5 British pounds B. 32.5 British pounds C. 12.5 British pounds D. 40 British pounds E. 30 British pounds Answer: A 8. How many British pounds would it cost to buy a pair of American designer jeans costing $45 if the exchange rate is 1.60 dollars per British pound? A. 38.125 British pounds B. 28.125 British pounds C. 48.125 British pounds D. 58.125 British pounds E. 18.125 British pounds Answer: B 9. What is the exchange rate between the dollar and the British pound if a pair of American jeans costs 50 dollars in New York and 100 pounds in London? A. 1.5 dollars per British pound B. 0.5 dollars per British pound C. 2.5 dollars per British pound D. 3.5 dollars per British pound E. 2 dollars per British pound Answer: B 10. What is the exchange rate between the dollar and the British pound if a pair of American jeans costs 60 dollars in New York and 30 pounds in London? A. 1.5 dollars per British pound B. 0.5 dollars per British pound C. 2.5 dollars per British pound D. 3.5 dollars per British pound E. 2 dollars per British pound Answer: E 11. When a country’s currency depreciates, A. foreigners find that its exports are more expensive, and domestic residents find that imports from abroad are more expensive. B. foreigners find that its exports are more expensive, and domestic residents find that imports from abroad are cheaper. C. foreigners find that its exports are cheaper; however, domestic residents are not affected. D. foreigners are not affected, but domestic residents find that imports from abroad are more expensive. E. None of the above. Answer: E 12. An appreciation of a country’s currency A. decreases the relative price of its exports and lowers the relative price of its imports. B. raises the relative price of its exports and raises the relative price of its imports. C. lowers the relative price of its exports and raises the relative price of its imports. D. raises the relative price of its exports and lowers the relative price of its imports. E. None of the above. Answer: D 13. Which one of the following statements is the most accurate? A. A depreciation of a country’s currency makes its goods cheaper for foreigners. B. A depreciation of a country’s currency makes its goods more expensive for foreigners. C. A depreciation of a country’s currency makes its goods cheaper for its own residents. D. A depreciation of a country’s currency makes its goods cheaper. E. None of the above. Answer: A 14. By early 2002, A. A Canadian dollar was worth only about 15 United States cents. B. A Canadian dollar was worth only about 20 United States cents. C. A Canadian dollar was worth only about 65 United States cents. D. A Canadian dollar was worth only about 100 United States cents. E. A Canadian dollar was worth only about 5 United States cents. Answer: C 15. The largest trading of foreign exchange occurs in A. New York. B. London. C. Tokyo. D. Frankfurt. E. Singapore. Answer: B 16. In 2001, A. 20 percent of foreign exchange transactions involved exchanges of foreign currencies for U.S. dollars. B. 10 percent of foreign exchange transactions involved exchanges of foreign currencies for U.S. dollars. C. 30 percent of foreign exchange transactions involved exchanges of foreign currencies for U.S. dollars. D. 40 percent of foreign exchange transactions involved exchanges of foreign currencies for U.S. dollars. E. 90 percent of foreign exchange transactions involved exchanges of foreign currencies for U.S. dollars. Answer: E 17. Which one of the following statements is the most accurate? The term spot exchange rate is A. misleading because even spot exchanges usually become effective only three days after a deal is struck. B. misleading because even spot exchanges usually become effective only four days after a deal is struck. C. misleading because even spot exchanges usually become effective only five days after a deal is struck. D. misleading because even spot exchanges usually become effective only six days after a deal is struck. E. misleading because even spot exchanges usually become effective only two days after a deal is struck. Answer: E 18. Which one of the following statements is the most accurate? Trades of U.S. dollars for Canadian dollars in New York are executed with A. a one-day lag. B. a two-day lag. C. a three-day lag. D. a four-day lag. E. a zero-day lag. Answer: A 19. Forward and spot exchange rates A. are necessarily equal B. do not move closely together C. The forward exchange rate is always above the spot exchange rate. D. while not necessarily equal, do move closely together. E. None of the above. Answer: D 20. A foreign exchange swap A. is a spot sale of a currency. B. is a forward repurchase of the currency. C. is a spot sale of a currency combined with a forward repurchase of the currency. D. is a spot sale of a currency combined with a forward sale of the currency. E. None of the above. Answer: C 21. An American put option on foreign exchange A. gives the buyer the right to sell the foreign currency at a known exchange rate at any time during the period of the option. B. gives the seller the right to sell the foreign currency at a known exchange rate at any time during the period of the option. C. gives the buyer the right to sell the foreign currency at a known exchange rate at a specific time in the future. D. obligates the buyer to sell the foreign currency at a known exchange rate at any time during the period of the option. E. None of the above. Answer: A 22. An American call option on foreign exchange A. obligates you to buy foreign currency at a known price at any time during the period of the option. B. gives you the right to buy foreign currency at a known price at any time during the period of the option. C. gives you the right to buy foreign currency at a known price at a specific day in the future. D. gives you the right to sell foreign currency at a known price at any time during the period of the option. E. None of the above. Answer: B 23. The exchange rate between currencies depends on A. the interest rate that can be earned on deposits of those currencies. B. the expected future exchange rate. C. the interest rate that can be earned on deposits of those currencies and the expected future exchange rate. D. national output. E. None of the above. Answer: B 24. Which one of the following statements is the most accurate? Countries in the euro zone include A. Austria, Australia, and Belgium. B. Austria, Belgium, and Finland. C. Austria and Finland. D. Austria, Belgium, Finland, and France. E. Austria, Belgium, Finland, France, and Germany. Answer: E 25. Which one of the following statements is the most accurate? A. Because dollar and DM interest rates are measured in comparable terms, they can move quite differently over time. B. Because dollar and DM interest rates are not measured in comparable terms, they can move quite differently over time. C. Because dollar and DM interest rates are measured in comparable terms, they move quite the same over time. D. Because dollar and DM interest rates are measured in comparable terms, they still move quite differently over time. E. None of the above. Answer: B 26. Which one of the following statements is the most accurate? Countries in the euro zone include A. Austria, Belgium, Finland, France, and Germany. B. Austria, Belgium, Finland, France, Germany, and Greece. C. Austria, Belgium, Finland, France, Germany, and Ireland. D. Austria, Belgium, Finland, France, Germany, and Italy. E. All of the above statements are correct. Answer: E 27. Which one of the following statements is the most accurate? Countries in the euro zone include A. Austria, Belgium, Finland, France, Germany, and Greece. B. Austria, Belgium, Finland, France, Germany, and Luxembourg. C. Austria, Belgium, Finland, France, Germany, Portugal, and Ireland. D. Austria, Belgium, Finland, France, Germany, Spain, and Italy. E. All of the above statements are correct. Answer: E 28. Which one of the following statements is the most accurate? Countries in the euro zone include A. Austria, Belgium, Finland, France, Germany, Greece, Luxemburg, and Ireland. B. Austria, Belgium, Finland, France, Germany, Luxembourg, Portugal, and Poland. C. Austria, Belgium, Finland, France, Germany, Portugal, Ireland, and the Czeck Republic. D. Austria, Belgium, Finland, France, Germany, Spain, Italy, and Ukraine. E. All of the above statements are correct. Answer: A 29. Which one of the following statements is the most accurate? A. The dollar rate of return on euro deposits is the euro interest rate plus the rate of depreciation of the dollar against the euro. B. The dollar rate of return on euro deposits is approximately the euro interest rate minus the rate of depreciation of the dollar against the euro. C. The dollar rate of return on euro deposits is the euro interest rate minus the rate of depreciation of the dollar against the euro. D. The dollar rate of return on euro deposits is approximately the euro interest rate plus the rate of appreciation of the dollar against the euro. E. The dollar rate of return on euro deposits is approximately the euro interest rate plus the rate of depreciation of the dollar against the euro. Answer: E 30. If the dollar interest rate is 10 percent and the euro interest rate is 6 percent, then A. an investor should invest only in dollars. B. an investor should invest only in euros. C. an investor should be indifferent between dollars and euros. D. it is impossible to tell given the information. E. All of the above. Answer: D 31. If the dollar interest rate is 10 percent, the euro interest rate is 6 percent, and the expected return on dollar depreciation against the euro is zero percent, then A. an investor should invest only in dollars. B. an investor should invest only in euros. C. an investor should be indifferent between dollars and euros. D. It is impossible to tell given the information. E. All of the above. Answer: A 32. If the dollar interest rate is 10 percent, the euro interest rate is 6 percent, and the expected return on dollar depreciation against the euro is 4 percent, then A. an investor should invest only in dollars. B. an investor should invest only in euros. C. an investor should be indifferent between dollars and euros. D. It is impossible to tell given the information. E. All of the above. Answer: C 33. If the dollar interest rate is 10 percent and the euro interest rate is 6 percent, and the expected return on dollar depreciation against the euro is 8 percent, then A. an investor should invest only in dollars. B. an investor should invest only in euros. C. an investor should be indifferent between dollars and euros. D. It is impossible to tell given the information. E. All of the above. Answer: B 34. If the dollar interest rate is 10 percent, the euro interest rate is 12 percent, and the expected return on dollar depreciation against the euro is negative 4 percent, then A. an investor should invest only in dollars. B. an investor should invest only in euros. C. an investor should be indifferent between dollars and euros. D. It is impossible to tell given the information. E. All of the above. Answer: A 35. Which of the following statements is the most accurate? A. A rise in the interest rate offered by dollar deposits causes the dollar to appreciate. B. A rise in the interest rate offered by dollar deposits causes the dollar to depreciate. C. A rise in the interest rate offered by dollar deposits does not affect the U.S. dollar. D. For a given euro interest rate and constant expected exchange rate, a rise in the interest rate offered by dollar deposits causes the dollar to appreciate. E. None of the above. Answer: D 36. Which of the following statements is the most accurate? A. For a given U.S. interest rate and a given expectation with regard to the future exchange rate, a rise in the interest rate paid by euro deposits causes the dollar to depreciate. B. For a given U.S. interest rate and a given expectation with regard to the future exchange rate, a rise in the interest rate paid by euro deposits causes the dollar to appreciate. C. A rise in the interest rate paid by euro deposits does not affect the value of the dollar. D. A rise in the interest rate paid by euro deposits causes the dollar to depreciate. E. None of the above. Answer: A 37. Suppose that the one-year forward price of euros in terms of dollars is equal to $1.113 per euro. Further, assume that the spot exchange rate is $1.05 per euro, and the interest rate on dollar deposits is 10 percent and on euros it is 4 percent. What is the rate of return on a covered euro deposit? A. 0.10 B. 0.101 C. 0.102 D. 0.103 E. 0.104 Answer: D 38. Suppose that the one-year forward price of euros in terms of dollars is equal to $1.113 per euro. Further, assume that the spot exchange rate is $1.05 per euro, and the interest rate on dollar deposits is 10 percent and on euros it is 4 percent. Under these assumptions, A. covered interest parity does hold. B. covered interest parity does not hold. C. It is hard to tell whether covered interest parity does or does not hold. D. Not enough information is given to answer the question. E. None of the above. Answer: B Essay Questions 1. In the year 2000, Americans flocked to Paris. What economic forces made French goods appear so cheap to residents of the United States? Answer: One major factor was a sharp fall in the dollar price of France’s currency. 2. Who are the major participants in the foreign exchange market? Answer: 1. Commercial banks 2. Corporations 3. Nonblank financial institutions 4. Central banks 3. Based on the case study, “A Tale of Two Dollars,” explain why errors in the currency market can be more costly to the Toronto Blue Jays baseball team than errors in the field. Answer: See page 329. The Toronto team has 80 percent of its revenue paid in Canadian dollars and 80 percent of its expenses set in U.S. dollars. Since the Canadian dollar has depreciated substantially, it causes big losses for the team by raising its expenses relative to its receipts. To protect itself from the vagaries of the exchange rate, the team tries to predict its need for U.S. dollars ahead of time so that it can sell Canadian dollars and purchase the American currency in advance to lock in the exchange rate. Errors in the currency market can thus be more costly to the team than on the field. 4. Explain what a “vehicle currency” is. Why is the U.S. dollar considered a vehicle currency? Answer: A vehicle currency is one that is widely used to denominate international contracts made by parties who do not reside in the country that issues the vehicle currency. Since 2001, ninety percent of foreign exchange transactions involve exchanges of foreign currencies for U.S. dollars; therefore, the dollar is considered a vehicle currency. 5. What are the factors affecting the demand for foreign currency? Answer: Three factors affect the demand for foreign currency. They are expected return, risk, and liquidity. 6. What is the interest parity condition? Answer: The condition that the expected returns on deposits of any two currencies are equal when measured in the same currency is called the interest parity condition. It implies that potential holders of foreign currency deposits view them as equally desirable assets, i.e. risk is assumed away. In notational forms: R$ = RE + (Ee$/E – E$/E) / E$/E. 7. Discusses the effects of a rise in the dollar interest rate on the exchanger rate. Answer: For a given euro interest rate and constant expected exchange rate, a rise in the interest rate offered by dollar deposits causes the dollar to appreciate. 8. Discusses the effects of a rise in the interest rate paid by euro deposits on the exchanger rate. Answer: For a given U.S. interest rate and a given expectation with regard to the future exchange rate, a rise in the interest rate paid by euro deposits causes the dollar to depreciate. 9. Explain the purpose of the following figure. Show the effects of German unification on Germany’s interest rate. Answer: The main purpose is to show that different interest rates exist for different assets since foreign currencies are different assets. From 1990 to 1995, the DM interest rate is higher than that of the United States. Excluding this period, the dollar rates are higher reflecting higher inflation in the United States and depreciating of the dollar versus the German currency. 10. Explain the purpose of the following figure. Answer: To show that spot and forward exchange rates are in general close to each other. Quantitative/Graphing Problems 1. Compute how many dollars it would cost to buy an Edinburgh Woolen Mill sweater costing 50 British pounds for the following exchange rates: Exchange Rate Price of a sweater in British pounds Price in dollars Number of dollars per one British pound 1 50 1.1 50 1.2 50 1.25 50 1.3 50 1.4 50 1.5 50 1.6 50 1.7 50 1.75 50 1.8 50 1.9 50 2 50 Answer: Exchange Rate Price of a sweater in British pounds Price in dollars Number of dollars per one British pound 1 50 $ 50.00 1.1 50 $ 55.00 1.2 50 $ 60.00 1.25 50 $ 62.50 1.3 50 $ 65.00 1.4 50 $ 70.00 1.5 50 $ 75.00 1.6 50 $ 80.00 1.7 50 $ 85.00 1.75 50 $ 87.50 1.8 50 $ 90.00 1.9 50 $ 95.00 2 50 $ 100.00 2. Compute how many British pounds it would cost to buy a pair of American designer jeans costing $45: Exchange Rate Price of a pair of American designer jeans Price in British pounds Number of dollars per one British pound 1 45 1.1 45 1.2 45 1.25 45 1.3 45 1.4 45 1.5 45 1.6 45 1.7 45 1.75 45 1.8 45 1.9 45 2 45 Answer: Exchange Rate Price of a pair of American designer jeans Price in British pounds Number of dollars per one British pound 1 45 45 1.1 45 40.90909091 1.2 45 37.5 1.25 45 36 1.3 45 34.61538462 1.4 45 32.14285714 1.5 45 30 1.6 45 28.125 1.7 45 26.47058824 1.75 45 25.71428571 1.8 45 25 1.9 45 23.68421053 2 45 22.5 3. Find the exchange rate between the dollar and the British pound for the following cases: Price of a pair of American designer jeans Price in British pounds Exchange Rate Number of dollars per one British pound 45 10 45 20 45 30 45 40 45 50 45 60 45 70 45 80 45 90 45 100 45 110 45 120 45 130 45 140 Answer: Price of a pair of American designer jeans Price in British pounds Exchange Rate Number of dollars per one British pound 45 10 4.5 45 20 2.25 45 30 1.5 45 40 1.125 45 50 0.9 45 60 0.75 45 70 0.642857143 45 80 0.5625 45 90 0.5 45 100 0.45 45 110 0.409090909 45 120 0.375 45 130 0.346153846 45 140 0.321428571 4. For the following 15 cases, compare the dollar rates of return on dollar and euro deposits: Case Dollar Interest Rate, R$ Euro Interest Rate, RE Expected Rate of Dollar Depreciation against Euro Rate of Return Difference between Dollar and Euro Deposits 1 0.1 0.06 0 2 0.1 0.06 0.04 3 0.1 0.06 0.08 4 0.1 0.12 -0.04 5 0.1 0.18 0 6 0.15 0.06 0 7 0.15 0.06 0.04 8 0.15 0.06 0.08 9 0.15 0.12 -0.04 10 0.15 0.18 0 11 0.2 0.06 0 12 0.2 0.06 0.04 13 0.2 0.06 0.08 14 0.2 0.12 -0.04 15 0.2 0.18 0 Answer: Case Dollar Interest Rate, R$ Euro Interest Rate, RE Expected Rate of Dollar Depreciation against Euro Rate of Return Difference between Dollar and Euro Deposits 1 0.1 0.06 0 0.04 2 0.1 0.06 0.04 0 3 0.1 0.06 0.08 -0.04 4 0.1 0.12 -0.04 0.02 5 0.1 0.18 0 -0.08 6 0.15 0.06 0 0.09 7 0.15 0.06 0.04 0.05 8 0.15 0.06 0.08 0.01 9 0.15 0.12 -0.04 0.07 10 0.15 0.18 0 -0.03 11 0.2 0.06 0 0.14 12 0.2 0.06 0.04 0.1 13 0.2 0.06 0.08 0.06 14 0.2 0.12 -0.04 0.12 15 0.2 0.18 0 0.02 5. For the table below, calculate the EXACT relationship. Case R$ RE Expected Rate of Dollar Depreciation against Euro E Rate of Return Difference between Dollar and Euro Deposits Exact formula 1 0.1 0.06 0 0.04 2 0.1 0.06 0.04 0 3 0.1 0.06 0.08 -0.04 4 0.1 0.12 -0.04 0.02 5 0.1 0.18 0 -0.08 6 0.15 0.06 0 0.09 7 0.15 0.06 0.04 0.05 8 0.15 0.06 0.08 0.01 9 0.15 0.12 -0.04 0.07 10 0.15 0.18 0 -0.03 11 0.2 0.06 0 0.14 12 0.2 0.06 0.04 0.1 13 0.2 0.06 0.08 0.06 14 0.2 0.12 -0.04 0.12 15 0.2 0.18 0 0.02 Answer: Case R$ RE Expected Rate of Dollar Depreciation against Euro E Rate of Return Difference between Dollar and Euro Deposits Exact formula 1 0.1 0.06 0 0.04 0.04 2 0.1 0.06 0.04 0 -0.0024 3 0.1 0.06 0.08 -0.04 -0.0448 4 0.1 0.12 -0.04 0.02 0.0248 5 0.1 0.18 0 -0.08 -0.08 6 0.15 0.06 0 0.09 0.09 7 0.15 0.06 0.04 0.05 0.0476 8 0.15 0.06 0.08 0.01 0.0052 9 0.15 0.12 -0.04 0.07 0.0748 10 0.15 0.18 0 -0.03 -0.03 11 0.2 0.06 0 0.14 0.14 12 0.2 0.06 0.04 0.1 0.0976 13 0.2 0.06 0.08 0.06 0.0552 14 0.2 0.12 -0.04 0.12 0.1248 15 0.2 0.18 0 0.02 0.02 6. Calculate the interest rate in the United States, if interest parity condition holds, for the following 15 cases: Case RE Expected Rate of Dollar Depreciation against Euro E R$ 1 0.06 0 2 0.06 0.04 3 0.06 0.08 4 0.12 -0.04 5 0.18 0 6 0.06 0 7 0.06 0.04 8 0.06 0.08 9 0.12 -0.04 10 0.18 0 11 0.06 0 12 0.06 0.04 13 0.06 0.08 14 0.12 -0.04 15 0.18 0 Answer: Case RE Expected Rate of Dollar Depreciation against Euro E R$ 1 0.06 0 0.06 2 0.06 0.04 0.1 3 0.06 0.08 0.14 4 0.12 -0.04 0.08 5 0.18 0 0.18 6 0.06 0 0.06 7 0.06 0.04 0.1 8 0.06 0.08 0.14 9 0.12 -0.04 0.08 10 0.18 0 0.18 11 0.06 0 0.06 12 0.06 0.04 0.1 13 0.06 0.08 0.14 14 0.12 -0.04 0.08 15 0.18 0 0.18 7. Calculate the interest rate in the euro zone if interest parity condition holds, for the following 15 cases: Case RE Expected Rate of Dollar Depreciation against Euro E R$ 1 0 0.06 2 0.04 0.11 3 0.08 0.16 4 -0.04 0.05 5 0 0.1 6 0 0.11 7 0.04 0.16 8 0.08 0.21 9 -0.04 0.1 10 0 0.15 11 0 0.16 12 0.04 0.21 13 0.08 0.26 14 -0.04 0.15 15 0 0.2 Answer: Case RE E R$ 1 0.06 0 0.06 2 0.07 0.04 0.11 3 0.08 0.08 0.16 4 0.09 -0.04 0.05 5 0.1 0 0.1 6 0.11 0 0.11 7 0.12 0.04 0.16 8 0.13 0.08 0.21 9 0.14 -0.04 0.1 10 0.15 0 0.15 11 0.16 0 0.16 12 0.17 0.04 0.21 13 0.18 0.08 0.26 14 0.19 -0.04 0.15 15 0.2 0 0.2 8. Assume that the euro interest rate is constant at 5 percent, and that the expected exchange rate is 1.05 dollars per one euro. Find the expected dollar return on euro deposits for the following cases: Case Today’s Dollar/Euro Exchange Rate Interest Rate on Euro Deposits Expected Dollar Depreciation Rate Against Euro (1.05 - E)/E Expected Dollar Return on Euro Deposits Re + (1.05 - E)/E 1 1.07 2 1.06 3 1.05 4 1.04 5 1.03 6 1.02 7 1.01 8 1 9 0.99 10 0.98 Answer: Case Today’s Dollar/Euro Exchange Rate Interest Rate on Euro Deposits Expected Dollar Depreciation Rate Against Euro (1.05 - E)/E Expected Dollar Return on Euro Deposits Re + (1.05 - E)/E 1 1.07 0.05 -0.0186916 0.031308411 2 1.06 0.05 -0.009434 0.040566038 3 1.05 0.05 0 0.05 4 1.04 0.05 0.0096154 0.059615385 5 1.03 0.05 0.0194175 0.069417476 6 1.02 0.05 0.0294118 0.079411765 7 1.01 0.05 0.039604 0.08960396 8 1 0.05 0.05 0.1 9 0.99 0.05 0.0606061 0.110606061 10 0.98 0.05 0.0714286 0.121428571 9. For the data in Question 8, plot today’s dollar/euro exchange rate against the expected dollar return on euro deposits. Answer: 10. Using the data from Question 8 and the plot in Question 9, show that if the interest rate in the United States is 10 percent, the exchange rate will be 1, and if the interest rate in the United States is 12 percent, the exchange rate will be 0.98 dollars per euro. Answer: Points 1 and 2 in the figure below correspond to these two equilibrium points. 11. Assume the U.S. interest rate is 10 percent, and the interest rate on euro deposits is 5 percent. For the following exchange rates, find the forward exchange rates. Today’s Dollar/Euro Exchange Rate E$/E Forward Exchange Rate F$/E 1 1.05 1.1 1.2 1.3 Answer: Using the covered interest rate parity will yield the second column in the table: F$/E = (R$ - RE) E$/E + E$/E Today’s Dollar/Euro Exchange Rate E$/E Forward Exchange Rate F$/E 1 1.05 1.05 1.1025 1.1 1.155 1.2 1.26 1.3 1.365 PAGE 164 _1085922660.xls Chart2 1.07 1.06 1.05 1.04 1.03 1.02 1.01 1 0.99 0.98 0.97 Sheet1 Case R$ RE E Difference 1 0.1 0.06 0 0.04 0.04 2 0.1 0.06 0.04 0 -0.0024 3 0.1 0.06 0.08 -0.04 -0.0448 4 0.1 0.12 -0.04 0.02 0.0248 5 0.1 0.18 0 -0.08 -0.08 6 0.15 0.06 0 0.09 0.09 7 0.15 0.06 0.04 0.05 0.0476 8 0.15 0.06 0.08 0.01 0.0052 9 0.15 0.12 -0.04 0.07 0.0748 10 0.15 0.18 0 -0.03 -0.03 11 0.2 0.06 0 0.14 0.14 12 0.2 0.06 0.04 0.1 0.0976 13 0.2 0.06 0.08 0.06 0.0552 14 0.2 0.12 -0.04 0.12 0.1248 15 0.2 0.18 0 0.02 0.02 Sheet2 Case RE E R$ 1 0.06 0 0.06 2 0.07 0.04 0.11 3 0.08 0.08 0.16 4 0.09 -0.04 0.05 5 0.1 0 0.1 6 0.11 0 0.11 7 0.12 0.04 0.16 8 0.13 0.08 0.21 9 0.14 -0.04 0.1 10 0.15 0 0.15 11 0.16 0 0.16 12 0.17 0.04 0.21 13 0.18 0.08 0.26 14 0.19 -0.04 0.15 15 0.2 0 0.2 Sheet4 Case E$E Re + (1.05 - E)/E 1 1.07 0 2 1.06 0 3 1.05 0 4 1.04 0 5 1.03 0 6 1.02 0 7 1.01 0 8 1 0 9 0.99 0 10 0.98 0 11 0.97 0 Case E$E Re + (1.05 - E)/E 1 1.07 0.0313084112 1.07 2 1.06 0.0405660377 1.06 3 1.05 0.05 1.05 4 1.04 0.0596153846 1.04 5 1.03 0.0694174757 1.03 6 1.02 0.0794117647 1.02 7 1.01 0.0896039604 1.01 8 1 0.1 1 9 0.99 0.1106060606 0.99 10 0.98 0.1214285714 0.98 11 0.97 0.1324742268 0.97 0.96 Sheet4 Sheet3 Case E$E Re (1.05 - E)/E Re + (1.05 - E)/E 1 1.07 0.05 -0.0186915888 0.0313084112 2 1.06 0.05 -0.0094339623 0.0405660377 3 1.05 0.05 0 0.05 4 1.04 0.05 0.0096153846 0.0596153846 5 1.03 0.05 0.0194174757 0.0694174757 6 1.02 0.05 0.0294117647 0.0794117647 7 1.01 0.05 0.0396039604 0.0896039604 8 1 0.05 0.05 0.1 9 0.99 0.05 0.0606060606 0.1106060606 10 0.98 0.05 0.0714285714 0.1214285714 11 0.97 0.05 0.0824742268 0.1324742268 0.96 0.05 0.09375 0.14375 0.95 0.05 0.1052631579 0.1552631579 0.94 0.05 0.1170212766 0.1670212766 0.93 0.05 0.1290322581 0.1790322581 0.92 0.05 0.1413043478 0.1913043478 0.05 0.05 0 _1085924098.xls Chart2 1.07 1.06 1.05 1.04 1.03 1.02 1.01 1 0.99 0.98 0.97 1 2 Sheet1 Case R$ RE E Difference 1 0.1 0.06 0 0.04 0.04 2 0.1 0.06 0.04 0 -0.0024 3 0.1 0.06 0.08 -0.04 -0.0448 4 0.1 0.12 -0.04 0.02 0.0248 5 0.1 0.18 0 -0.08 -0.08 6 0.15 0.06 0 0.09 0.09 7 0.15 0.06 0.04 0.05 0.0476 8 0.15 0.06 0.08 0.01 0.0052 9 0.15 0.12 -0.04 0.07 0.0748 10 0.15 0.18 0 -0.03 -0.03 11 0.2 0.06 0 0.14 0.14 12 0.2 0.06 0.04 0.1 0.0976 13 0.2 0.06 0.08 0.06 0.0552 14 0.2 0.12 -0.04 0.12 0.1248 15 0.2 0.18 0 0.02 0.02 Sheet2 Case RE E R$ 1 0.06 0 0.06 2 0.07 0.04 0.11 3 0.08 0.08 0.16 4 0.09 -0.04 0.05 5 0.1 0 0.1 6 0.11 0 0.11 7 0.12 0.04 0.16 8 0.13 0.08 0.21 9 0.14 -0.04 0.1 10 0.15 0 0.15 11 0.16 0 0.16 12 0.17 0.04 0.21 13 0.18 0.08 0.26 14 0.19 -0.04 0.15 15 0.2 0 0.2 Sheet4 Case E$E Re + (1.05 - E)/E 1 1.07 0 2 1.06 0 3 1.05 0 4 1.04 0 5 1.03 0 6 1.02 0 7 1.01 0 8 1 0 9 0.99 0 10 0.98 0 11 0.97 0 Case E$E Re + (1.05 - E)/E 1 1.07 0.0313084112 1.07 2 1.06 0.0405660377 1.06 3 1.05 0.05 1.05 4 1.04 0.0596153846 1.04 5 1.03 0.0694174757 1.03 6 1.02 0.0794117647 1.02 7 1.01 0.0896039604 1.01 8 1 0.1 1 9 0.99 0.1106060606 0.99 10 0.98 0.1214285714 0.98 11 0.97 0.1324742268 0.97 0.96 Sheet4 0 0 0 0 0 0 0 0 0 0 0 Sheet3 0 0 0 0 0 0 0 0 0 0 0 Case E$E Re (1.05 - E)/E Re + (1.05 - E)/E 1 1.07 0.05 -0.0186915888 0.0313084112 2 1.06 0.05 -0.0094339623 0.0405660377 3 1.05 0.05 0 0.05 4 1.04 0.05 0.0096153846 0.0596153846 5 1.03 0.05 0.0194174757 0.0694174757 6 1.02 0.05 0.0294117647 0.0794117647 7 1.01 0.05 0.0396039604 0.0896039604 8 1 0.05 0.05 0.1 9 0.99 0.05 0.0606060606 0.1106060606 10 0.98 0.05 0.0714285714 0.1214285714 11 0.97 0.05 0.0824742268 0.1324742268 0.96 0.05 0.09375 0.14375 0.95 0.05 0.1052631579 0.1552631579 0.94 0.05 0.1170212766 0.1670212766 0.93 0.05 0.1290322581 0.1790322581 0.92 0.05 0.1413043478 0.1913043478 0.05 0.05 0