Solutions to self test problems
ST1.
= -1.02%
This discount implies a declining future spot rate for Swiss francs.
ST2. A U.S. trader could sell US dollars, buy spot Canadian dollars, and invest in Canadian securities to earn 12 percent. Simultaneously the trader could sell Canadian dollars forward at a 3 percent annual discount. At the end of the forward period, the trader could convert Canadian dollars back to U.S. dollars. The net effect of these transactions is the trader earns 9 percent (12 percent interest less 3 percent depreciation in value) compared with the 8 percent return available in the U.S. market.
ST3.
a. Yen price = 140 yen/dollar x $12,000 = 1,680,000 yen
b. Yen price = 120 yen/dollar x $12,000 = 1,440,000 yen
A decline in the value of the dollar relative to the yen makes U.S. goods more attractive abroad
ST4.
S3 = $0.000514/lira
The higher Italian interest rate relative to the U.S. rate implies (using IFE) that the lira should decline in value relative to the dollar, as this computation verifies
1 The ECU shown at the bottom of Table 3-2 represents a European Currency Unit. The ECU is a composite “currency” that consists of fixed amounts of currencies of the European countries that are part of the Exchange Rate Mechanism, a process by which member countries manage their currencies to maintain exchange rates within predetermined ranges. Each ECU represents a “basket” currency derived from a weighted average of the currencies of all countries participating in the Exchange Rate Mechanism. The weights for each currency depend on each members proportion of intra-European trade and the size of its economic output as measured by gross national product.
2 The date at which money must be exchanged among the parties in a spot foreign currency transaction is known as the value date. It is customarily set to the second working day after the day on which the transaction is concluded. For example, a spot transaction entered into in Frankfurt on Monday will not normally be settled until the following Wednesday.