Question 1 If the indirect quote for U.S. dollars in Sydney is 0.

7927, what is the equivalent indirect quote in New York City for Australian dollars? A) 0.3964. B) 1.2615. C) 0.7927.

Question 2 The direct method of foreign exchange quotations: A) is used primarily in the U.K., Canada, and the U.S. B) quotes the domestic currency per unit of foreign currency which is FC:DC. C) quotes the foreign currency per unit of domestic currency which is DC:FC.

Question 3 Assume an investor living in Italy can borrow in the domestic lira (ITL) or in the foreign French franc (FRF). Given the following information, determine whether an arbitrage opportunity exists. If so, how much would the investor profit by borrowing ITL 44,280,000 or the equivalent in FRF? (Assume a period of one year & state the profit in domestic currency terms). Spot rate (ITL/FRF) Forward rate (ITL/FRF) Domestic (Italian) interest rate (%) Foreign (French) interest rate (%) A 3.50000 An arbitrage opportunity results in a profit of ITL 1,424,774. An arbitrage opportunity results in a profit of ITL 58,725. No arbitrage opportunity. 295.20000 299.10000 5.00000

B C

Question 4 The annual interest rate is 8.02% in Mexico and 7.45% in Canada. The spot peso-dollar exchange rate is 569.87 MXN/CAD, and the one-year forward rate is 526.78 MXN/CAD. If an arbitrage opportunity exists, how much would a person living in Mexico make borrowing 15,000,000 pesos or the equivalent in Canadian dollars? A) 1,292,410 pesos. B) 1,284,230 pesos. C) 1,304,207 pesos.

Question 5 The domestic interest rate is 8% and the foreign interest rate is 6%. If the spot rate is 4 domestic units/foreign unit, what should the forward exchange rate be for interest rate parity to hold? A) 3.930. B) 4.250. C) 4.075. Question 6 Given the following information, what is the forward exchange rate implied by interest rate parity? U.S. interest rate = 9%. North Korea interest rate = 10%. Spot rate = 1.65 KPW/$. A) 0.612 KPW/$. B) 1.635 KPW/$. C) 1.665 KPW/$.

Question 7 Assume that the EUR:USD six-month forward exchange rate is quoted at 1.2102 1.2112. What is the bid-ask spread as a percentage of the ask price based on a direct quote for euros? A) 0.0848%. B) 0.0847%. C) 0.0826%.

Question 8 An investor can invest in Tunisian dinar at r = 6.25% or in Swiss francs at r = 5.15%. She is a resident of Tunisia and the current spot rate is CHF:TND 0.8105. What is the approximate one-year forward rate expressed in CHF:TND? A) 0.8016. B) 0.8215. C) 0.8194.

Question 9 The Worldwide Equity-Income Fund is a U.S. based mutual fund whose objective is to seek current income through participation in the U.S. and global equity and fixed-income markets. According to its bylaws, Worldwide can invest no more than 25% of its funds in the assets of any one country. Currently, it holds a substantial amount of foreign securities, heavily weighted in British stocks and bonds. Mary Larson, CFA, has recently joined Worldwide as a portfolio manager. Larson is a recent graduate of Washington State University with a double major in Economics and Finance, where she studied interest rate parity and purchasing power parity. Larsons role at Worldwide will encompass many areas, including forecasting and strategy. Larson has been asked to examine the current portfolio holdings, and project how the current position will perform over the next year under various interest rate scenarios. U.S. interest rates are currently 7% and the real rate of interest has been about 2% over the past 20 years. Today's spot rate is $1.7921 per British pound. Due to a weakening in world oil prices, as well as the results from the recent U.S. presidential election, Larson determines it is necessary to calculate her own forecast of the expected inflation rate in the U.S. The international Fisher relation predicts that the interest rate differential between two countries should be equal to the expected inflation differential. Therefore, countries with higher expected inflation rates will have higher nominal interest rates, and vice versa. A change in domestic rates could lead Larson to suggest substantial changes to the current portfolio corporation. Part 1) Larson is asked to recall the correct representation of purchasing power parity. St is the exchange rate at time t, expressed in units of foreign currency per domestic currency. ID and IF are the expected rates of inflation in the domestic and foreign countries, and E( ) denotes an expected value. Which of the following is the most accurate representation of purchasing power parity (PPP)? A) E(S1) / S0 = [1 + E(iDC)] / 1 + E(iFC)]. B) E(S0) / S1 = [1 + E(iFC)] / 1 + E(iDC)]. C) E(S1) / S0 = [1 + E(iFC)] / [1 + E(iDC)]. Part 2) Larson predicts that the spot exchange rate for British pounds will be $1.8653 per pound in one year. Using the information above and assuming the expected inflation rate in the U.S. is 6%, Larson has arrived at her conclusion based upon the assumption that the inflation rate in Great Britain will be: A) 1.8%. B) 3.6%. C) 10.3%.

Part 3) Larson recalls that while relative PPP does tend to hold closely over the long term, PPP may not hold in the short run due to one of several reasons. Which of the following is least likely a reason why PPP may not hold in the short run? A) Factors of production are mobile in the short run. B) A common consumption basket does not exist across countries. C) Transactions costs prevent arbitrage. Part 4) Based upon the interest rate information given above, and using the exact version of the Fisher relationship, Larson calculates that the market-consensus implied expected inflation rate in the U.S. is: A) 4.9%. B) 5.0%. C) 4.7%. Part 5) The foundation of Larsons predictions of future spot rates and interest rates depend upon several key assumptions. Larson knows that if capital markets are integrated, capital can flow freely across borders. Given this information about capital markets which one of the following statements is most accurate? A) Nominal interest rates should be equal across countries. B) Real interest rates should be equal across countries. C) Inflation rates should be equal across countries. Part 6) Suppose that the current spot exchange rate for U.S. Dollars into British Pounds is $1.4339 per pound. If the current interest rate is 5% in the U.S. and 7% in Britain, what is the expected spot exchange per pound rate 12 months from now according to uncovered interest rate parity? A) $1.4612. B) $1.4212. C) $1.4071.

Question 10 Assume that the GBP:USD six-month forward rate is quoted at a bid of 1.72546 and an ask of 1.72776. What is the spread on the indirect quote for a U.S. dealer? A) USD:GBP 0.000772. B) GBP:USD 0.000772. C) GBP:USD 0.002300

Question 11 Jennifer Nance has recently been hired as an analyst at the Central City Bank in the currency trading department. Nance, who recently graduated with a degree in economics, will be working with other analysts to determine if there are profit opportunities in the foreign exchange market. Nance has the following data available: US Dollar ($) UK Pound () Euro () Expected inflation rate 6.0% 3.0% 7.0%

One-year nominal interest rate

10.0%

6.0%

9.0%

Market Spot Rates US Dollar ($) UK Pound () Euro () US Dollar ($) UK Pound () Euro () $1.0000 0.6250 1.2500 $1.6000 1.0000 0.5000 $0.8000 2.0000 1.0000

Market 1-year Forward Rates US Dollar ($) UK Pound () Euro () US Dollar ($) UK Pound () Euro () $1.0000 0.6098 1.2373 $1.6400 1.0000 0.4928 $0.8082 2.0292 1.0000

Part 1) Using the same data above, Nance wishes to determine the order of the real interest rate levels implied by the Fisher Effect in the United States, the United Kingdom and Europe. What is the order of real interest rate levels, ranked from highest to lowest? A) United States, Europe, United Kingdom. B) United Kingdom, United States, Europe. C) United States, United Kingdom, Europe. Part 2) Using the same data above, Nance determines that the highest estimate of the expected $/ spot rate in one year is implied by: A) purchasing power parity (PPP). B) uncovered interest rate parity (IRP). C) the Fisher effect.

Question 29 - 89078 The domestic interest rate is 7% and the foreign interest rate is 9%. If the forward exchange rate is 5 domestic units per foreign unit, what spot exchange rate is consistent with interest rate parity (IRP)? A) 4.91. B) 5.72. C) 5.09.

Question 12 Bob Bowman, CFA, is an analyst who has been recently assigned to the currency trading desk at Ridgeway Securities, a hedge fund management firm based in New York. Ridgeways stellar reputation as a top tier hedge fund manager has been built upon many years of its portfolio outperforming both the market and its peer group. Ridgeways portfolio is globally diversified, with less than 35% of its assets currently invested in U.S. securities. Ridgeway seeks to enhance its portfolio returns through the active use of currency futures that correspond to its investments. From time to time, Ridgeway will also take advantage of arbitrage opportunities that arise in the currency markets.

In his new position, Bowman will be reporting to the head currency trader, Jane Anthony. Among Bowmans new responsibilities, he will be performing an ongoing analysis of global currency rates. His analysis is expected to include projections of future exchange rates and a sensitivity analysis of exchange rates in a variety of interest rate scenarios. Using his projections as a starting point, he will then be expected to suggest possible trading strategies for Ridgeway. Bowman knows that his analysis will begin with the underlying principles of the five basic international parity relationships. However, he does realize that certain principles will be more useful than others when applied to a real-world situation. To test his knowledge of the subject, Anthony has asked Bowman to prepare a presentation on the interrelationships between exchange rates, interest rates, and inflation rates. For the presentation, Bowman will need to prepare a brief analysis of current market conditions and formulate some basic trading strategies based upon his projections. He also will need to demonstrate his ability to calculate predicted spot rates for currencies, given some basic inflation rate and interest rate assumptions. Bowman begins his task by gathering the following current market statistics: 1 year U.S. Interest Rates = 8% 1 year U.K. Interest Rates = 10% 1 year $/ forward rate = 1.70 Current $/ spot rate = 1.85

Part 1) Bowman knows that if the forward rate is lower than what interest rate parity indicates, the appropriate strategy would be to borrow: A) pounds, convert to dollars at the spot rate, and lend the dollars. B) pounds, convert to dollars at the forward rate, and lend the dollars. C) dollars, convert to pounds at the spot rate, and lend the pounds. Part 2) Bowman also knows that if the forward rate is higher than what interest rate parity indicates, the appropriate strategy would be to borrow: A) dollars, convert to pounds at the spot rate, and lend the pounds. B) dollars, convert to pounds at the forward rate, and lend the pounds. C) pounds, convert to dollars at the spot rate, and lend the dollars. Part 3) Based on the information above, Bowman would like to calculate the forward rate implied by interest rate parity. The answer is: A) 1.82 $/. B) 1.88 $/. C) 1.67 $/. Part 4) A junior colleague asks Bowman for the mathematical equation that describes interest rate parity. Which of the following equations most accurately describes interest rate parity? (S0 is the spot exchange rate expressed in dollars per unit of foreign currency, F0,T is the forward exchange rate, and rUS and rFX are the risk-free rates in the U.S. and foreign country.) A) S1 = F0,t [(1+rUS) / (1+rFX)]. B) F0,t = S0 [(1+rFX) / (1+rUS)]. C) F0,t = S0 [(1+rUS) / (1+rFX)]. Part 5) Now, suppose Bowman has the following information available to him: the current spot exchange rate for Indian Rupees is $0.02046. Inflation over the next 5 years is expected to be 3% in the U.S. and 5% in

India. Bowman must calculate the U.S. Dollar/Indian Rupee expected future spot exchange rate in 5 years implied by purchasing power parity (PPP). The answer is: A) $0.02250. B) $0.01858. C) $0.02010. Part 6) Bowman routinely calculates the expected spot rate for the Japanese Yen per U.S. dollar. He knows that the current spot exchange rate is 189.76 Yen/USD. He is also aware that the interest rates in Japan, Great Britain, and the U.S. are 8%, 4%, and 5% respectively. Calculate the expected spot rate for Yen/USD in a one year period. A) 187.95 Yen/USD. B) 184.49 Yen/USD. C) 195.18 Yen/USD.

Question 13 If 1 + the domestic interest rate < (1 + the foreign interest rate the forward rate) / spot rate, an investor seeking arbitrage profits should borrow: A) foreign, convert to domestic, lend out domestic, and convert back to foreign. B) domestic, lend out foreign, and convert back to domestic. C) domestic, convert to foreign, borrow foreign, and convert back to domestic.

Question 14 Mary Beth Morgan and Shaban Shoshi are currency traders for Mercury Forex Inc. They have compiled the following information concerning currencies in Sweden (SEK), New Zealand (NZD), and United States (USD). SEK/USD USD/NZD Spot bid rate Spot ask rate 3-month forward bid rate 7.8927 7.9021 7.8780 $0.6994 $0.7000 $0.7010 $0.7020

3-month forward ask rate 7.8794

As they are reviewing the information in the currency quotes, Morgan states, the Swedish Krona is trading at a forward premium, however that premium is less than 1%. Shoshi replies, Ill have to double check that, but it looks like the NZD is weak relative to the USD. With regard to their statements: A) both are incorrect. B) only Morgan is correct. C) only Shoshi is correct.

Question 15 Suppose the AUD trades for USD 0.735802 in New York and JPY 79.3048 in Tokyo. The USD trades for JPY 109.2343 in Tokyo. Is there an arbitrage opportunity available for a currency trader? A) No, there is no arbitrage opportunity. B) Yes, the trader can make USD 0.0872 per USD invested. C) Yes, the trader can make USD 0.0135 per USD invested.