The Foreign Exchange Market

1. A German sports car is selling for 70,000 Euros. What is the dollar price in the U.S. for the German car if the
exchange rate is 0.90 euros per dollar?

2. An investor in England purchased a 91-day T-bill for $987.65. At that time, the exchange rate was $1.75 per pound.
At maturity, the exchange rate was $1.83 per pound. What was the investor’s holding period return in pounds?

3. An investor in Canada purchased 100 shares of IBM on January 1st at $93.00/share. IBM paid an annual dividend of
$0.72 on December 31st. The stock was sold that day as well for $100.25. The exchange rate is $0.68/Canadian
dollar on January 1st and $0.71/Canadian dollar on December 31st. What is the investor’s total return in Canadian
dollars?

4. The current exchange rate is 0.93 euros per dollar, but you believe the dollar will decline to
0.85 euros per dollar. If a euro-denominated bond is yielding 2%, what return do you expect in U.S. dollars?

5. The 6-month forward rate between the British pound and the U.S. dollar is $1.75 per pound. If 6-month rates are 3%
in the U.S. and 150 basis points higher in England, what is the current exchange rate

6. If the Canadian dollar to U.S. dollar exchange rate is 1.28 and the British pound to U.S. dollar exchange rate is 0.62,
what must the Canadian dollar to British pound exchange rate be?

7. The New Zealand dollar to U.S. dollar exchange rate is 1.36 and the British pound to U.S. dollar exchange rate is
0.62. If you find that the British pound to New Zealand dollar is trading at 0.49, what would you do to earn a riskless
profit?

8. In 1999, the euro was trading at $0.90 per euro. If the euro is now trading at $1.16 per euro, what is the percentage
change in the euro’s value? Is this an appreciation or depreciation?

9. The Brazilian real is trading at 0.375 real per U.S. dollar. What is the U.S. dollar per real exchange rate?

10. The Mexican peso is trading at 10 pesos per dollar. If the expected U.S. Inflation rate is 2% while the Mexican
inflation rate is 23% over the next year, what is the expected exchange rate in one year?

11. The current exchange rate between the U.S. and Britan is $1.825 per pound. The 6-month forward rate between the
British pound and the U.S. dollar is $1.79 per pound. What is the percentage difference between current 6-month
U.S. and British interest rates?

12. The current exchange rate between the Japanese yen and the U.S. dollar is ¥120 per dollar. If the dollar is expected to
depreciate by 10% relative to the yen, what is the new expected exchange rate?

13. If the price level recently increased by 20% in England while falling by 5% in the U.S., how much must the
exchange rate change if PPP holds? Assume that the current exchange rate is 0.55 pounds per dollar.

14. A one-year CD in Europe is currently paying 5%, and the exchange rate is currently 0.99 euros per dollar. If you
believe the exchange rate will be 1.04 euros per dollar one year from now, what is the expected return in terms of
dollars?

15. Short-term rates are 2% in Japan and 4% in the U.S. The current exchange rates is 120 yen per dollar. What is the
expected forward exchange rate?