Question: On January 1 2015 one U S dollar can be exchanged

On January 1, 2015, one U.S. dollar can be exchanged for eight foreign currencies (FC). The dollar can be invested short term at a rate of 4%, and the FC can be invested at a rate of 5%.
1. Calculate the direct and indirect spot exchange rates as of January 1, 2015.
2. Calculate the 180-day forward rate to buy FC (assume 365 days per year).
3. If the spot rate is 1 FC = $0.740 and the 90-day forward rate is $0.752, what does this suggest about interest rates in the two countries?
4. Explain why a weak dollar relative to the FC would likely increase U.S. exports.
5. Discuss what would happen to the forward rate if the dollar strengthened relative to the FC.

Sale on SolutionInn
  • CreatedApril 13, 2015
  • Files Included
Post your question